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In the forex market, as one currency gains strength, another weakens and knowing when to buy and sell helps forex traders to make money. In fact, if you have bought and sold stocks, you will say that it is quite similar to it. It is but forex trading is also different in many other ways. In the stock market, when you see a company that has potential, you buy its shares and hope to make a profit. However, in the forex market there are long term trends that affect whether a currency will be strong or weak; but most of the trading in a forex market is done based on daily fluctuations of the currency rate.
This brings up to pip. A pip is the smallest unit of price that is traded for a particular currency. Most currencies in the forex market are traded to four decimal points and this means that a pip is 0.0001 or in other words it is 1/100 of a cent. Many people might end up thinking that a pip is a negligible amount until they realize that a standard trade of $100,000 is $10.
When you buy a currency, you have to sell another currency and that is the reason why currency prices are always in pairs. The most active pair in the forex market is USD/EUR. The more active a currency pair, the smaller is the difference between the bid and ask price, and there is a possible spread of just 2 pips for the most actively traded currency pair. Active markets have lower pip spread while currencies that are sold less frequently have higher pip spreads. If the pip spread is lower, it is easier to make a profit and that is why many traders pay special attention to pip and pip spread.
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