In the past lessons we have seen how in Forex it is necessary to consider the value of the PIP and how this varies depending on the cross currency on which it is invested. At this point it is good to remember a good habit or the diversification of the portfolio. Avoid trading only on a currency pair but diversify your purchases and sales. For example, if in a moment the dollar is better on the euro but worse against sterling, it will be better for you to invest on the dollar in the EUR/USD (i.e. by opening a downward position on the EUR/USD) and investing in sterling in the GPB/USD (i.e. opening a Upward position on the GBP/USD).
In this regard, the merits of the EUR/USD must be honoured to be the currency pair that costs less, what brokers offer to the lowest spread and especially the one on which it is easier to find information that can affect its progress.
Remarking this, we also resume an in-depth concept previously, or the cost of the broker. Brokers earn their own on the spread, which is the difference between bid and ask. For example, if the EUR/USD is quoted 1,300/1,302 the broker’s earnings will be 2 pips or 10.
However, the spread should not be considered only for this mechanism, that is, to calculate the additional cost to add to the overall operation, but also to understand the logic of closing the same operation.
Close a Forex Trading operation
When you close a Forex trading operation sometimes the accounts do not come back because we are not fully prepared for the different variables that are considered at the time of closure. For example, if the spread on a cross is 2 and the PIP is 10, the cost of the operation will be 20, but if the spread is 3 with a PIP of 10, the operation costs 30.
Let’s take an example on which we ask you a little attention.
Let’s set a stop limit order or take profit, which will automatically close the transaction when the ask value reaches a certain quota (e.g. 120). We pretend to have a bid/ask of 100/103, then we set a take profit for example at 120 that will close the operation when the ask quotation will reach 120.
The operation, which in this case is long (purchase), will be closed when you reach a bid/ask equal to 117/120.
As you can see, the spread of 3 pip remains unchanged, so in this case they both climbed 17 pips but having arrived ask a 120 as requested by us, the stop limit will close the operation.
The importance of the spread is very important because a difference in many pips can also be absorbed by a simple reversal of trends.
Hold on and repeat the whole, because they are concepts a little ‘ intrigued but with the practice it will seem much simpler. Practice that you can also do in demo mode on the platforms we have presented on our homepage to play on the stock exchange.
In Lesson 13 we’ll delve into the characteristics of Pips.