These three concepts (pip, point, and tick) although simple tend to confuse a lot of beginners and even seasoned traders.
They actually may have different meanings depending on if you are trading Forex, Stocks, Indices, or Commodities futures.
Let’s dive into them.
What is a point in Forex?
A point is typically the highest precision on the Forex currency pair price.
The last decimal place of the price.
Let’s say that the EUR/USD price is 1.23456.
If it moves to 1.23457, we say that it moved one point.
You need to be aware of one thing, most of the Forex brokers have 3 decimal places on JPY pairs and 5 decimal places on the other currency pairs.
Those brokers are the ones that match the current point definition.
Some other Forex brokers though have fewer decimal places.
We’ll get to them in a while.
What is a point in Stocks, Indices, or Commodities Futures?
Different from Forex, a point in stocks or indices is not related to the decimal places.
In fact, a point is a whole number, which is also commonly called a full point.
When a stock moves from $20.00 to $21.00, we say that it moved one point.
When an index like Nasdaq or Dow Jones moves from $12000.00 to $12005.00, we say that it moved five points.
Basically, a point is how much dollars or euros (or any other currency) did a stock, commodity, or index has moved.
Pretty simple, right?
What is a pip?
Pip stands for “percentage in point”.
This term is mainly used in Forex trading.
It’s a way of measuring Forex currency pairs movements.
A pip is equivalent to 10 forex points.
So, when you see someone saying that is targeting a 300 points move, it means that he’s trying to profit 30 pips.
Now, let’s be careful with one thing.
Different forex brokers may have the price with different decimal places for the same pair.
Forex currency pairs with 5 vs 4 decimal places
Forex pairs prices, except JPY pairs, usually have five decimal places.
For example, you would see the EUR/USD price as 1.23456.
Some forex brokers though, although a minority, may have one less decimal place.
In this case, you would see the EUR/USD price as 1.2345.
This is where a lot of people mess up.
When you have four decimal places, the price doesn’t have explicitly a point there.
If it moves from 1.2345 to 1.2346, EUR/USD would have moved one pip and not one point.
You can imagine as if it had a zero in the end, like 1.23450.
When it moves to 1.23460, it moved one pip which is the same as saying that it moved ten points.
Now let’s look at the JPY pairs.
Forex currency pairs with 3 vs 2 decimal places
JPY pairs are the exception from the other currency pairs.
Typically their price is presented with three decimal cases.
As an example, you could see the GBP/JPY pair price as 123.456.
This is the most common way.
But the same brokers that cut the last decimal place on the other pairs, will also cut it here.
In these brokers, you would see the price as 123.45.
So, if the GBP/JPY price moves from 123.45 to 123.46, it moved one pip and not one point.
Here you can add a zero to the end of the price to make it clearer.
123.450 moving to 123.460 is a one pip movement, which is equivalent to ten points.
What is a tick?
A tick is the smallest move that an asset can make.
Typically, the vast majority of the markets have precision up to the last decimal case.
But this is not true for all markets, and it may depend on your broker too.
Let’s say that we are trading Dax, and the price is €13000.00
If your broker only updates the price every €0.50 move, then the tick size is 0.50.
It means that you’ll only get prices like 13000.00, 13000.50, 13001.00 and so on.
Always increasing or decreasing according to the tick size.
Here you can find a list of the futures tick sizes and tick values.
This can also happen in Forex currency pairs.
Although you may have a currency pair with, let’s say, 5 decimal places, the price may only move 1 pip at a time, which would be the tick size.
If we use our EUR/USD example, your broker would only show you prices that change the 4th decimal place.
It would be like: 1.23456, 1.23466, 1.23476, 1.23486, and so on.
Again, the increase or decrease factor is always proportional to the tick size.
The best brokers to trade are the ones that have the smallest tick size possible.
This is what you learned today
- A point in Forex is the last decimal place of the price.
- A point in stocks, indices futures, or commodities is one whole number.
- A pip is used in Forex and is equivalent to ten points.
- A tick is the smallest move that the price can make. It may be bigger than the precision of the price, meaning that the price moves in steps bigger than that precision.