Spreads are measured in pips. For most currencies, a pip is the fourth place after the decimal point, or 1/100 of a percent. (For trades involving the Japanese yen, a pip is the second place after the decimal point, or 1 percent.) In a forex trade, if the bid price was 1.3244 and the ask price was 1.3246, the spread for the transaction was 2 pips. Brokers may also charge a commission, either a flat fee or one based on a percentage of the amount of the transaction. Because currencies trade in pairs, you’re always actually buying one currency and selling the other no matter whether you’re going long or short. Let’s say you’re trading the British pound/U.S. dollar (GBP/USD) currency pair. You would buy that pair—that is, buy the pound and sell the dollar—if you expected the value of the first currency, known as the base currency, to increase in value in comparison with the second currency, known as the quote currency. You would sell that pair—sell the pound and buy the dollar—if you expected the value of the pound to decrease in value in comparison with the dollar. Unlike in the stock market, where you first borrow shares to sell short, in the forex market, selling a currency you don’t own is a very simple process in which you just place a sell order.
