Easiest way to learn about Pip, Pipettes and Spread
A price interest point (pip) is the most important unit of measurement in currency. It measures the change in the exchange rate for a currency pair.
A pip “Price Interest Point” is one unit of the fourth decimal point in a currency rate. So for dollar currencies, a pip is 1/10.000 of a dollar. GBP/USD = 1.5486, The ‘6’ is the pip.
There is one exception, however. All currency pairs involving the Japanese yen are quoted to only two decimal places (0.01). So one pip in yen pairs is one unit of the second decimal point. This is because the yen is much closer in value to 1/100 of other major currencies. So in the above example, the pip will be ‘4’.
Pips are used as a reference for gains or losses. The actual cash amount a pip represents depends on the pip value, which is different for different pairs. You don’t have to worry about calculating the pips yourself, the broker software will do it automatically.
A pipette is a fraction of a pip, in fact, it is 1/10 of a pip. GBP/USD= 1.54864, the ‘4’ is pipette.
They appear as the 5th (3rd decimals for yen pairs) in a currency rate.
For traders, the spread is the cost of trading. you can think of spread as the commission for the broker or bank for their services.
Let’s say that the official EUR/USD rate is 1.3000. If the broker-sold you the EUR/USD at the same price, he or she would not make any money. So brokers quote a slightly higher price, for example, 1.3001. The difference between the official rate and the broker quote is 1 pip. That difference is called Spread.
The higher the liquidity of a currency pair, the lower the spread.