In the example above, the spread is .05 or 5 pips. Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the inter-bank market. When trading smaller amounts, the spread is typically larger. Credit card companies typically apply a spread of 200-300 pips. For investors and speculators, a lower or tighter spread translates into easier profit taking due to movements in exchange rates.
All trades result in the buying of one currency and the selling of another, simultaneously.
It is not necessary to own the quote currency prior to selling, as it is sold short. An open trade or position is one in which a trader has either bought or sold one currency pair and has not sold or bought back an adequate amount of that currency pair to effectively close the trade . For more detail on the mechanics of a currency trade, please refer to the Overview of a Currency Trade document. Foreign Exchange Rate refers to the number of units of one currency needed to purchase one unit of another, or the value of one currency in terms of another. There are 2 ways in the market to quote prices.