Currencies move in tiny increments — and the cost of trading them is tinier still, hidden in plain sight. Two words explain both: pip and spread.
The pip: FX’s smallest step
A pip is the standard smallest move in a currency pair. For most pairs that’s the fourth decimal place — so EUR/USD going from 1.0850 to 1.0851 is a one-pip move. (For yen pairs, which are quoted to two decimals, a pip is the second decimal: USD/JPY 150.20 → 150.21.)
Pips give traders a common unit to talk about moves and size positions, without arguing over decimals.
The spread: your real cost
Remember the bid and ask from quoting? The gap between them is the spread, measured in pips — and it’s the main cost of an FX trade. There’s usually no separate commission; the spread is the fee.
The moment you buy at the ask, you could only sell back at the (lower) bid, so you start every trade slightly behind. Cross the spread enough times and it adds up.
Tight vs wide
- Major pairs (like EUR/USD) are hugely liquid, so spreads are razor-thin — often a pip or less.
- Exotic pairs trade far less, so their spreads are much wider — a real drag on frequent trading.
Spread width is basically a liquidity gauge: the more a pair trades, the cheaper it is to trade.
Worked example
EUR/USD is quoted bid 1.0850 / ask 1.0851. The gap is 1 pip (0.0001).
Trade one standard lot (€100,000): the spread costs 0.0001 × 100,000 = $10 per round trip — you buy at 1.0851 and could only sell back at 1.0850. Tiny per trade, but it’s charged every time you trade, so an active trader doing dozens of round trips a week pays it over and over. Now compare an exotic like USD/TRY with a 40-pip spread: the same-size trade starts you hundreds of dollars behind. That’s why spread width — i.e. liquidity — quietly decides how much active trading costs.
The takeaway
A pip is the smallest standard move in a pair (usually the 4th decimal). The spread — the bid/ask gap in pips — is the hidden cost of every FX trade, tight on majors and wide on exotics. (This is education, not investment advice.)