Forex Academy:
Primary School
5 minutes
Lesson 5
What is the transaction cost?
- What is the unit of expression for the price movement of a currency pair?
- Why does a currency pair have 2 different prices?
- What is the transaction cost (Spread)?
What is the unit of expression for the price movement of a currency pair?
The unit that expresses the price movement of a currency pair is a pip.
In Forex, a pip is a standardized unit used for measuring price changes across all currency pairs.
While there are numerous currency pairs, price fluctuations are universally expressed in this unit. For instance, discussions about price movements often mention changes in the EUR/USD currency pair in terms of (…) pips.
However, currency pairs that include the Japanese Yen (JPY) operate differently compared to other currency pairs.
Case 1:
Prices of currency pairs containing Japanese Yen (JPY) are shown to the 3rd decimal place.(USD/JPY, AUD/JPY, EUR/JPY…)
The 2nd decimal digit represents the value of the pip.
(The second digit after the “.”)
When the USD/JPY price is changed from 114.600 to 114.613 ,
we can say that the USD/JPY price increased by 1.3 pips.
Case 2:
Prices for currency pairs that do not contain Japanese Yen (JPY) are shown to 5 decimal places.
(EUR/USD, GBP/USD, AUD/USD…)
The 4th decimal digit represents the value of the pip.
(4th digit after “.”)
When the price of EUR/USD is changed from 1.19015 to 1.19000 ,
we can say that the price of EUR/USD decreased by 1.5 pips.
It’s very simple, you just need to remember the following:
For currency pairs containing JPY, the 2nd decimal place is the value of the pip.
For currency pairs that do not contain JPY, the 4th decimal place is the value of the pip.
Calculating price changes can be used for the following purposes:
– Calculate transaction costs;
– Calculate profit/loss.
– When the price changes by 0.0001 (or even less), instead of saying 0.0001,it’s easier to say “the price has changed by 1 pip”!
Why does a currency pair have 2 different prices?
At the foreign exchange counter,
- Currency pairs will have 2 types of prices
- The Buy price is the price at which you buy the currency pair.
- The Sell price is the price at which you sell the currency pair.
- In Forex trading there are also 2 types of prices.
- The price to buy a currency pair is called the Ask price.
- The selling price of a currency pair is called the Bid price.
In MetaTrader 4 trading platform, prices of curreny pairs are shown as below
What is the transaction cost (Spread)?
The difference between the Ask price (buy price) and the Bid price (sell price) is called Spread.
For example:
When you trade EUR/USD, Spread = Ask price – Bid price.
We see the spread for EUR/USD is 0.00019 USD = 1.9 pips.
This 1.9 pips is the transaction cost.
So how much money is 1.9 pips equivalent to?
The value of a pip is the value of the quote currency. (The quote currency is the right currency in the currency pair)
For example:
1.9 pips EUR/ USD = 0.00019=0.00019 USD
1 pip USD/ JPY =0.01=0.01 JPY
When trading at Hirose, the only transaction cost is the Spread,
there are no commissions or any other hidden cost.
The lower the spread, the less the transaction cost.
Note: Not only Hirose but all other brokers have Spread fees.
Spreads of other currency pairs at Hirose are shown in the table below.
Therefore, we encourage you to trade these two currency pairs.
| MetaTrader4 | |
| Currency Pair | Standard pip |
| EURUSD | 0.8 |
| USDJPY | 1.2 |
| GBPUSD | 1 |
| AUDUSD | 0.9 |
| EURGBP | 0.8 |
| AUDJPY | 1.2 |
| EURJPY | 1.4 |
| USDCAD | 1.1 |
| USDCHF | 0.9 |
*This table is for reference only. For the latest typical spreads, please visit: https://hiroseag.com/markets/forex/
The lesson on “Transaction Cost” ends here. If you have any questions, please contact us.
Let’s check to see if you understand the lesson!
In the next lesson, we will guide you about how to calculate profit in Forex Trading. Please continue to follow.
If you have any questions, please contact us.