Understanding the Importance of 5-digit Pricing

In forex trading, often we hear the terms 5-digit and 4-digit brokers. But what exactly are those terms? And why is 5-digit considered better?

For experienced scalpers or traders, the term 5-digit pricing may be familiar. But for those of you newcomers who don't understand the term, this article will explain what 5-digit pricing in forex brokers is and why it deserves to be superior to its earlier version.

What is a 5-digit Broker?

A 5-digit broker is a forex broker that provides a 5-digit pricing quote after a comma. When you buy EUR/USD, for example, you will do it at a certain price, i.e. 1.1280, 1.1290, etc. Well, that price is what is meant as a forex broker price quote. The digit after the comma is the number after the number "1.", which in this case means "1280" or "1290". If calculated, these numbers only amount to 4 digits.

Price changes from the entry level will determine the amount of profit and loss you get. To buy EUR/USD at 1.1280 and close a position at the level of 1.1290 for example, you will get a profit of 10 points.

So, what about the example of trading at a 5-digit broker? By adding 1 digit after the comma, 5-digit brokers can provide more accurate pricing. If we assume in the previous example when you open a long position at the price of 1.12800 and close it when the EUR/USD is at 1.12900, your total profit will reach 100 points.

So, is it true that 5-digit brokers can make traders profit more than they should? Well, it is not that simple.

What you need to know here is that the difference in nominal quotes at 5-digit and 4-digit brokers is only in terms of "name", not the value. The last digit in the 5-digit price quote is a fractional pip or pipette which is 10 times smaller than the last pip. So, for a profit of 100 points at a 5-digit platform, the actual profit value reads 10.0 pips.

See also: Forex Profit Calculator

Advantages of 5-digit Pricing

After revealing the real difference, you may be wondering again. If it's only different in the name, then why is the 5-digit pricing said to be better? Wouldn't it be better to trade with 4-digit pricing that is more familiar?

Here is the difference. 5-digit pricing can represent more accurate price movements. When trading at a 4-digit platform, the profit from 1.1280 to 1.1290 will always be recorded as 10 pips. But in 5-digit platforms, it won't always be 10.0 pips. As they can display the smallest movement to the last (5th) digit, it can present very detailed values.

When the 4-digit broker only shows 1.1280, the 5-digit broker can display the numbers at 1.12801, 1.12802, 1.12803, up to 1.12809. So it is possible for the long position to be opened at 1.12803 and be closed at 1.12908. In that scenario, your profit would be recorded at 105 points or 10.5 pips.

Let's try to compare it with 4-digit pricing. Suppose you are trading with a standard lot whose value is $10 per pip, then the profit earned will only be $100. Meanwhile, at 5-digit brokers, the profit can amount to $105.

For long-term traders who are aiming for large profits, an additional $5 profit may not mean much. But for short-term traders who set smaller targets, the difference is very influential for their profitability. The accumulation of these small profit differences can bring big changes if accumulated over time.

That is why scalpers and day traders are generally more sensitive to differences in the forex broker's quoting system. But more than that, 5-digit brokers also have advantages that apply to all traders in general. Here are some of them:

1. Spreads Could Be Lower

For the same reason as the advantages above, the spreads at 5-digit brokers are tighter than what they could be in the 4-digit platforms. Let's say you open a buy position on a 4-digit platform with the bid price of 1.1277 and the ask of 1.1280. Your position will be subject to a 3 pip spread. While in 5-digit brokers, the bid price can be written as 1.12778 and the ask at 1.12804. With a quote like that, your spread is only worth 2.6 pips.

2. Catching Up with the Latest Development

Always up to date with the latest market development is something that must be done, not only by traders but also by forex brokers. The 5-digit quote itself exists because of the growing turnover in the forex market which is getting bigger day by day. Just like the 4-digit quote is the upgrade from the 3-digit pricing, the high rate of Forex turnover demands the broker to use the 5-digit price quote to accommodate the price of the current forex market.

3. Faster Order Execution

5-digit broker platforms are usually more responsive because they can display more active price movements. Even for order execution, the process can be faster than orders at 4-digit brokers.

4. More Transparent

Since the 5-digit pricing is more accurate, you can get better price transparency. In the abovementioned situation, trading at a 4-digit broker will not make you aware of the potential profit which can be more than 10 pips. The price turnover in the forex market is already working with a 5-digit quote calculation. So if the profit that you get should be 10.5 pips, where will the remaining 0.5 pip profits go?

5. More Effective Trailing Stop

On 4-digit platforms, if a trailing stop is set at 15 points, the order will only be triggered when the price moves exactly 15 pips. So if the open buy is at 1.1280, the trailing stop will be activated only after the price moves up to 1.1295. In 5-digit brokers, the 15-point trailing stop calculation also counts the last 2 digits behind the comma. It doesn't matter if the other only acts as a fractional pip. So for the trailing stop of an open buy at 1.12800, the price only needs to move up to 1.12815 for the trailing stop to be triggered. However, keep in mind that this one advantage can be a drawback if you trade in volatile markets.

Final Words

It is clear that 5-digit quotes are the embodiment of the latest developments in the forex market. Brokers that only facilitate 4-digit platforms can be said to be slow in catching up with the current market progress. Furthermore, forex brokers who are unable to provide 5-digit quotes are often considered small or young in experience, because they are unable to finance the more expensive 5-digit platforms. Ideally, the 4-digit platform is more economical because it is out of date.

In many ways, 5-digit pricing can be said to be superior to the 4-digit quote. Besides being suitable for scalpers, it provides better execution speed and transparency. It is also safe to note that 5-digit brokers allow short-term traders to gain more profit due to their high accuracy.

However, they also need some important adjustments, particularly in the stop loss and take profit calculations. Let's say you plan to place a stop loss of 20 pips from the buy level at 1.12800, then to get the correct stop loss level you need to subtract 200 points (20.0 pips) from the open price. Thus, the correct stop loss is set at 1.12600 (1.12800 - 200 points), not at 1.12780 (1.12800 - 20 points).

For those of you who use forex trading robots, pay attention to whether the system has been adapted to 5-digit pricing. If not, then manual adjustments need to be made so that the robot's response and performance on the 5-digit platform can be optimal. If you don't want to bother resetting the system, you can choose those that have been set with 5-digit pricing or one that can be applied to both types of price quotes. Make sure to test your automated trading system on a demo account no matter how good it's said to be.