What are Pips in Forex Trading?
Ok, let’s all agree that there are a lot of terms used in the various different financial markets that pretty much describe the same thing but use a different word to do so. In this article I’m going to break down the terms from various markets that are meant to describe the minimum price movement in that particular market.
In this Article:
- What are Pips in Forex Trading?
- What is a Pip?
- What is a Pipette?
- What are Ticks in Futures?
What are Pips in Forex Trading?
I’m sure you have heard the term pip before but may not have been explained what it actually is or means. The term pip stands for “percentage in point”. It is the minimum price movement in the Forex market.
What is a Pip?
A pip is the smallest unit of price for any currency pair in the spot Forex market. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit. For example, EURUSD might equal 1.1138. In this instance, a single pip equals the smallest change in the fourth decimal place which in this case is 0.0001. So if the EURUSD pair goes up 1 pip the value would go from 1.1138 to 1.1139. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent. Said another way, 100 pips is the equivalent of one cent worth of price movement.
However, with the Japanese yen a pip equals 0.01 and is typically quoted in 2 decimal places instead of 4. For example, the USDJPY pair might be priced a 115.50. One pip of price movement would be equal to 0.01 in this case. So if the USDJPY went up 1 pip the price would move from 115.50 to 115.51.
What is a Pipette?
Now this is where things can get a little bit tricky. Because the spot Forex market has become so competitive over the years almost all retail Forex brokers have gone to a 5 decimal point system in order to increase efficiency and offer more competitive pricing. This is where a new term called pipette comes into play.
A pipette is one-tenth of a traditional pip. For example, if the EURUSD pair moved from 1.11380 to 1.11381, it moved 1 pipette or a tenth of a pip. If you had a position of one standard lot of 100,000 units in the EURUSD currency pair then a 1 pipette move would be worth approximately $1 while a 1 pip move would be worth about $10.
This concept of a pipette applies to Yen pairs as well. For example, if the USDJPY has moved from 115.500 to 115.501 then it has moved 1 pipette or one-tenth of a pip.
What are Ticks in Futures?
In futures and other markets the minimum fluctuation in price is called a tick which is basically a different term to describe the same thing as a pip but it’s used in the futures market instead. A tick represents the minimum up or down movement that can be traded on a specific futures contract.
As an example of a futures contract, the FTSE, which is the equity index for the London Stock Exchange, the minimum tick size is 0.5 of an index point. This means that if we have a price of 5452.0 it can only be followed by 5452.5 for a move higher or 5451.5 for a move lower. This is because it can only move in its minimum tick size of 0.5 of one index point. It can move more than that but never less than that.
As another example, the minimum tick size for the S&P 500 equity index out of the United States is 0.25 or a quarter of one index point. This means that you have 4 ticks per index point. Therefore, a price of 2100 can be only be followed by 2100.25 for an uptick or 2099.75 for a downtick and so on.
The tick value is the monetary value assigned to a tick by each respective futures exchange. The profit or loss on any futures contract is translated by the movement in ticks multiplied by the tick value. For example, the minimum tick value for one S&P500 e-mini contract is $12.50 for one contract and there are 4 ticks for every one point. This means that if you buy one contract each point of movement will be worth $50 US dollars ($12.50 x 4 ticks = $50 per point).
Now you know that the terms ticks and pips are used to describe the minimum price fluctuation. The only difference is that different markets seem to want to play with their own jargon. If you are a Forex trader then you talk in pips. If you are a futures trader then you talk in ticks. Simple as that!
Author: Brandon Turner