Best 5 Digit Forex Brokers

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There are many people who are still confused as to how forex price quotes, which used to have 4-decimal places, now have 5-decimal places. Indeed, the switch from 4-decimal to 5-decimal pricing occurred in 2008. It is virtually the standard now as far as pricing of currencies is concerned. But what is 5-decimal pricing and what is the big deal about it?

Brief History of the Conversion from 4-decimal to 5-decimal Pricing

Pricing of currency assets before 2008 used the 4-decimal pricing system. This was a system where the smallest unit of representation of price movement (which is the PIP), was priced in whole numbers. In other words, currency quotes carried 4 decimal places after the whole number. At that time, 1 pip was equal to 0.0001 points. Pricing of the EUR/USD for instance, would have been quoted as 1.1138/1.1140, with a change being represented by a change in the 4th decimal place. So if the price of EUR/USD rose by 3 pips (i.e. 0.0003 points) relative to the quote provided, the price would then be quoted as 1.1141/1.1143.

But as competition for clients increased with a sharp increase in the number of retail forex brokers, some brokerages decided to offer their clients more precise pricing so as to make their spreads very competitive.

This 5-decimal price quotation format is now the norm in the world of forex. Traders should however note that the last decimal point in the 5-decimal format is only one-tenth of a pip. It is not equivalent to one pip. Some call this a pipette. With the 5-decimal forex pricing system, the price quote for the EUR/USD with reference to the pricing earlier provided, could be written as 1.11358/1.11368:

5-decimal price quotation format

You can see that the 5th decimal is represented as a superscript, or as a smaller font. This is a reflection of the fractional characteristic of this last digit, which is only a tenth of a full pip in value. We therefore refer to the brokers presenting the 5-decimal pricing system as 5-decimal forex brokers.

It is not all currency pairs that have undergone a 5-decimal transformation. The Yen crosses used to be priced into two decimal places. These pairs have also had an extra digit added to make the Yen crosses 3-decimal priced pairs.

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What Are the Advantages of a 5-Decimal Pricing System?

For retail brokers, it is all about being able to make and retain profits, while at the same time not using some of the profits in avoidable client recruitment programs. Any business owner will easily indicate that repeat customers are the mainstay of any business, as it saves the business money that could have been spent in advertising and new client recruitment campaigns. Repeat customers also help to spread the word, bringing in more business with zero costs to the business owner.

So it is with retail forex. Revenue from forex brokerage comes primarily from spreads which are generated from the trading activity of the traders on a platform. Spread revenue is therefore volume based, and the best option is to provide a system which attracts high volume traders and keeps them within the system.

On the other hand, these same high volume traders are also looking for ways to cut down on the spreads they pay for trades. As such, spread reduction has become a marketing tool for forex brokers who are looking to attract these high volume traders. Similarly, reduced spreads lead to reduced costs for traders, and this also provides an incentive for low volume traders to become high volume traders.

So in a nutshell, the essence of introducing 5-decimal pricing was to:

a) Lower spreads and incentivize higher volume trading by reducing trading costs.

b) Create greater precision in pricing and order fills.

c) Promote high frequency trading, which benefits from quick entries and exits and therefore can use such precision in pricing to good advantage.

Trading with 5-Digit Brokers: The Implications

The firs obvious implication would be on how the values of open positions on the forex platforms are expressed. When expressing the value of open positions using points (instead of the currency value), the trader would have to multiply the values by 10 to reflect the extra decimalization.

The same would be the case for all settings on the Take Profit and Stop Loss, as well as the Trailing Stop settings. These values would already have been multiplied by 10 to reflect the new 5-decimal pricing realities.

Also, EAs that have been programmed using the 4-decimal system would have to be reprogrammed to interpret the new 5-decimal pricing structure properly. For instance, an EA setting which interprets a Stop Loss level as 50 pips, would have to express this as 500 points under the 5-decimal system.

5-Decimal Points Representation in Trade Orders

The MT4 and MT5 platforms are not built to display fractions of pip movements. This is why the 5th decimal is accounted for by multiplying the number of points that price has moved by 10 when price orders are displayed. This is confirmed in the display below.

5-Decimal Points Representation in Trade Orders

The encircled area in the MT4 terminal window shows that the position, which is that of 1 mini-lot and equivalent to a pip move of $1 per pip, is 110 points, or 11.0 pips in the red. The extra “0” simply means that the position is in the negative by 11.0 pips.

When setting the stop loss or take profit targets in an active position, you can either do this by entering the price manually into the spaces provided, or by entering the distance in points at which the SL and TP should be away from the market price.

5 digit forex trading platforms

In this instance, the aim is to create a Stop Loss of 50 pips and a Take Profit of 100 pips. Since there is no fractionation of pips in the MT4 platform, the trader would add a 0 to 50 and 100 to get 500 points for the stop loss and 1000 points for the TP levels.

It is not only the number “0” that is used to represent the 5th decimal or pipette. Any number can be used. The most important thing is to remember that an additional digit has to be added to the number in points to represent the extra decimal.

5 digit forex brokers

Here, we can see that the SL is 70.8 pips and the TP is 141.2 pips. Rather than just leave the SL and TP at 70 pips and 141 pips respectively, the trader has opted to introduce precision with the 5th decimal to produce the figures derived above.

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