Pips, Points and Ticks: What’s the Difference?

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To those unfamiliar with financial markets, the words “PIPs,” “Points,” and “Ticks” may sound like something out of a Dr. Seuss book.

Let’s try to demystify these important measurements by starting with the most important one — the PIP.

A PIP is short for “Percentage in Point” and is a reference for FX traders to communicate the difference in the price movement of a currency pair.

A PIP in FX trading is expressed in most currency pairs as the 4th digit to the right of the decimal place in a currency pair’s price.

As individuals or tourists, we are familiar with the “Buy” and “Sell” prices of foreign exchange.

We are often dismayed by the vast difference in buying and selling back foreign currencies to the banks or FX Exchanges.

Often the difference is measured in dollars or cents.

As traders in the FX Markets, we have “Buy” and “Sell” pricing as well but the difference between the two is completely different.

We work in small fractions of currencies and we call these PIPs.

In this example, we are showing a chart on EURUSD where the Euro is the Base Currency and the US Dollar is the Quote Currency and the Sell price $1.14436.

You will note that the figures 4 and 3 are larger than the others.

The 3 represents one 10,000th of a US Dollar…this is a PIP.

As a practical example, if we take the Buy Price of EURUSD of $1.14450 and subtract the Sell price of $1.14436, we get 1.4 PIPs, which is the spread.

The 5th decimal place is a Point, but we will come back to that later.

Let’s look at another example.

If we see the price of EURUSD drop from 1.1440 down to 1.1340 we note that it has travelled 100 PIPs.

In the case of Currency Pairs where the Quote Currency is USD, CAD, NZD, HKD, or AUD, 100 PIPs is the equivalent of 1 cent and in the case of CHF, it is 1 Centime.

A PIP, with these currencies, will always be 1/10,000th of the unit currency.

But what about currencies where the figures are much larger like the Japanese Yen where the price is 108 Yen to the Dollar.

Then, we consider 1/100th of a Yen to be one PIP with the two figures just to the right highlighted.

So, if we see the price of USDJPY drop from 108.15 to 107.15, we note the 100 PIPs is the equivalent of 1 Yen.

The Spread then on USDJPY, at this moment, would be 1.5 PIPs.

Gold and Silver are usually traded against the USD and we can consider a PIP to be the same as an American Cent.

So, in the case of XAUUSD or Gold, where the USD is the Quote Currency at a Sell price of $1291.34, we would say that the Spread is 18 cents.

Most currency pairs are quoted with 5 decimal places. Don’t be confused by this:

The PIPs live here.

Most Currency Pairs have their PIPs in the 4th decimal place.

The Yen, Gold and Silver have their pairs have their PIPs in the second decimal place.

Points are basically one-tenth of a PIP and you will find that the Point is used all through your Valutrades MT4 platform.

Why? Because MT4 reads to the last decimal place in currency pairs.

So, for example, when you measure vertical distance with your crosshairs in MT4, you need to mentally remove the figure on the right to give you your “PIP” value.

Also, when setting features like the MT4 Trailing Stop, you will note that the figures are in Points.

To set this in PIPs, simply add a “0” on the end.

The Tick, on the other hand, is even smaller than a point and represents the minimum price change of an instrument.

Ticks are measured differently between FX, Commodities and Indices and they are generally not something that the average retail trader needs to worry about.

If you are curious, you can see these incremental Tick movements simply by opening an MT4 order ticket.

That’s all for now.  Happy trading with Valutrades and we will see you soon.
 
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