Forex Trading Must-Know: Why can a one pip movement determine your profit and loss?

The Spread Is the Truth About Trading Costs

When you open your forex trading software, you’ll see two prices—bid and ask. The seemingly small difference between them is the spread, which is also the broker’s most direct source of income.

Simply put, the broker sells to you at a higher price and buys back your position at a lower price. The difference between these two prices is your trading cost. For example, if the EUR/USD ask price is 1.1234 and the bid price is 1.1236, the difference is 2 units—that’s 2 pips.

What Exactly Is a Pip? Why Is It Important to Understand

Pip (Point) is the smallest change in a forex quote. For most currency pairs, one pip equals a change of the fourth decimal place (0.0001).

For example, EUR/USD rises from 1.1234 to 1.1235, a 1 pip increase. It may seem tiny, but because forex trading uses leverage, this small fluctuation can amplify into hundreds or even thousands of dollars in profit or loss.

Currency pairs involving the Japanese Yen are calculated differently—here, a pip is the second decimal place. For example, USD/JPY moves from 107.835 to 107.845, also a 1 pip increase.

How Much Is a Pip Worth? It Depends on Three Factors

The actual value of a pip is determined by these three conditions:

1. The currency pair you’re trading
2. Your trading size
3. The current exchange rate

Let’s look at real examples.

Case 1: How to Calculate USD/CAD

Suppose you buy 50,000 USD/CAD at 1.3050 and make a profit of 50 pips.

Step 1: Calculate the value of one pip in the quote currency (CAD):
50,000 × 0.0001 = 5 CAD per pip

Step 2: Convert to the base currency (USD):
5 CAD ÷ 1.3050 = approximately 3.83 USD per pip

Step 3: Calculate total profit:
50 pips × 3.83 USD/pip = $191.50

Case 2: Loss Scenario with USD/JPY

You buy 50,000 USD/JPY at 123.456 and then it drops to 123.256, losing 20 pips.

Calculation steps:
50,000 × 0.01 = 500 JPY per pip
500 JPY ÷ 123.256 ≈ 4.057 USD per pip
-20 pips × 4.057 USD/pip = Loss of $81.14

Are Spreads Fixed or Variable?

Forex platforms typically use two types of spreads.

Fixed Spread remains constant regardless of market fluctuations. This mode is provided by market makers—brokers buy positions in bulk from liquidity providers and sell to retail traders. Since brokers control the quotes, they can lock in the spread. The advantage is predictable trading costs, but during volatile markets, slippage (difference between expected and actual execution price) can occur.

Variable Spread changes with market conditions. Non-market maker brokers source quotes from multiple liquidity providers and pass them directly to you without interference. This results in more transparent pricing, but during economic data releases or low liquidity, spreads can widen rapidly, increasing trading costs for frequent traders.

How to Calculate How the Spread Affects Your Trading Costs

In actual trading, converting the spread into real costs requires two data points: value per pip and trade size.

For example, with EUR/USD, if you buy at 1.04111 and sell at 1.04103, immediately reversing your position results in a loss of 0.8 pips.

Assuming you buy 1 mini lot (10,000 units), with each pip worth 1 USD, then the cost = 0.8 pips × 1 USD/pip = $0.80.

If you increase to 5 mini lots, the cost becomes = 0.8 pips × 5 USD/pip = $4.

This explains why larger trade sizes make the relative cost of the spread smaller, but the absolute cost increases.

Why Do Beginners Often Overlook This Detail?

Many traders focus on finding entry points but ignore the hidden cost of the spread. In high-leverage trading, even a 1-2 pip difference can determine whether your account survives or not. Choosing a platform with lower spreads or trading during times of high market liquidity (rather than before major economic data releases) can significantly reduce your overall trading costs.