The Difference Between a Pip, a Point & a Tick
Mar 26, 2021 11:53AM
5 min read
You have no doubt heard the terms pips, points, and ticks. It would be hard not to when it seems to be all you hear traders talk about. You may wonder what is a pip in monetary terms? How are pips calculated? How do you know how many pips you need to generate a good day’s profits?
Pip, points, and ticks are terms traders use to describe price changes in the Forex market. For a novice trader, it can be tricky to work out what the differences are because it appears that the terms are similarly used by traders. To be fair, it’s possible some novice traders still aren’t clear on the differences, so may confuse the terms at times.
Pips and points are each unique in the degree of price change they signify in a currency pair and also how they are used in the Forex Market.
This might take a bit of getting your head around. So, take your time to digest the differences. Spend some time watching the buy/sell area on your chart where you place your order and it may start to make more sense. Look at a list of currency pair prices also.
It’s important to know this information. It’s ground-level knowledge for Forex traders.
What Is A Pip?
Firstly, a pip is an acronym for ‘point in percentage’. Some traders say ‘percentage in point’) or ‘price interest point’. A pip represents the smallest unit of price movement to the right of the decimal. A pip expresses the change in price between two currencies. It may be small but it is an important price measurement tool in the Forex market.
The majority of currency pairs are priced to four decimal places so the smallest change is the very last (fourth) decimal point.
For instance, EURUSD starting price at 1.2145 rises to 1.2150
Price has increased by 1 pip
A pip is the equivalent of 1/100 of 1% or one basis point. For example, the smallest move the USD/CAD currency pair can make is $0.0001 or one basis point.
A pip is typically the last decimal place of a price quote.
Just to confuse you further, the majority of pairs go out to 4 decimal places. But there are exceptions like the Japanese yen pairs. These go out to two decimal places. For instance, EURUSD is 0.0001, and for USD/JPY, it is 0.01
Examples below of two decimal places –
- GBPJPY ~ 141.627
- USDJPY ~ 103.882
- EURJPY ~ 121.885
Examples of four decimal places –
- EURCHF ~ 1.07884
- GBPUSD ~ 1.36745
- EURAUD ~ 1.57663
How do you know the value of a pip?
Pip values will be variable. As Forex is a global market, many people across the world are trading with different trading account currency. So, the value of one pip in one currency may be different from another currency pair.
For instance, your account may be pound sterling or perhaps U.S. Dollar. So, pip value has to be translated to the currency your account may be traded in.
Imagine you are trading in U.S. dollars a pip in one currency pair may be worth say $1.00. But, across the world, a trader is trading with a sterling pound trading account. His pip in the same currency pair may be £0.85p. Hopefully, this makes sense.
The value of a pip can be calculated by dividing 1/10,000 or 0.0001 by the exchange rate
Do I really need to work all this out myself?
Yes, we know, it’s as clear as mud. And, no, thank goodness, you don’t have to work it out yourself. Don’t worry, you don’t need to fret about this. Your broker calculates all this stuff. Don’t think you have to sit at your trading station with your calculator open before you place a trade.
If you are interested in going deeper into this subject, you can disappear down the rabbit hole. A good alternative is to install a Pip Value Calculator on your trading platform and let it do all the work for you.
You can also add a pip counter extension to your trading platform. This shows profit by pip on the trading chart.
What Is A Point?
You’ll often wonder what the point is. If you didn’t before, you probably are now!
No, seriously, points are also called pipettes. But you will mostly hear them referred to as points. Some Forex brokers quote currency pairs beyond standard 4 and 2 decimal places. They may quote currency pairs to 3 and 5 decimal places. These are what is called fractional pips – also known as points.
A point is equal to one-tenth of a pip. So, 10 points = 1 pip. A point represents the smallest price changes to the left side of the decimal point.
For instance, if GBPUSD moves from 1.20544 to 1,20545 that is .00001 USD move higher is one point. Take a look at the picture below as an example from a trading platform.
On your trading platform, the digit representing a tenth of a pip is usually to the right of the two larger digits. Above you see the price for GBPUSD. On the sell option, the number 8 on the far right is the point. On the buy option, the number 6 on the far right is the point.
What Is A Tick?
A point is composed of ticks, which are fractional price movements to the right side of the decimal on a currency pair. It is the difference between the current market price and the last-quoted price or the amount the market has moved in a given time. A tick is not a fixed number. It fluctuates in real time depending on market conditions. In a high liquidity market, a tip could represent a single pip. In a low liquidity market, it could represent a price move of 30+ pips.
You don’t need a complex understanding of pips, points, and ticks. As long as you grasp the basics, you will know enough, and probably more than many others. The majority of retail traders look at how many pips they want as target profit and stop-loss zones.
