In trading terms, points, pips, and ticks are used to highlight the changes in the financial market. Since even the slightest change can cause ripples of effect, points and ticks are assigned to denote them. A point stands for the smallest price change on the left side of the decimal point and a tick denotes the same but on the right side of the decimal point. Pips are used in the forex trading market to denote the change in a currency pair. In short, this is the traders’ lingo. But, there is more to these words. Let’s dig deeper.
Defining the Terms
Points: Points are typically used in the futures trading market. When the smallest rise in the price occurs on the left side of the decimal point, it is referred to as a point. For example, if S&P 500 E-Mini (ES) futures see a change in futures point value and jumps to 1314.00 to 1315.00, we will say that there has been a price change by one point. The movement of a point has a dollar value attached to it. However, the exact value of a point varies by exchange. For example, with each point movement in crude oil on the Chicago Mercantile Exchange, the market sees a fall or rise of $1000.
Ticks: Points are the smallest increment in price. These points are composed of ticks like minutes are made up of seconds. Traders talk about ticks when there is a movement in prices on the right side of the decimal in the futures contract. Tick is the smallest possible price variation that can be measured in the trade market. The value of ticks is not set in stone. Its size and value changes as per the futures contract. For example, the size of a tick in the S&P 500 E-Mini is 0.25, in crude oil, it is 0.01, and it is 0.10 in gold futures (GC).
The increment in a point is determined by the size of a tick. Take the case of S&P 500 E-Mini. As one tick is worth 0.25, it will take four ticks to increase a point. Similarly, crude oil will see a rise in one point with the movement of 100 ticks, and GC will see a change when atleast 10 ticks move.
As mentioned earlier, ticks are fractions of a point. For crude oil in CME, every tick value is $10 as each point is worth $1000, making the tick value exactly 1/100th of the point. You can visit the websites of various futures trade to know more about the values.
Pips: Pips are used in forex trading. They signify currency pair price movements. Pips move when the fourth decimal place of the price moves by one. For example, if your base currency EUR and the counter currency is USD, the currency pair will be EUR/USD. If this pair moves from 1.1506 to 1.1507, this is the movement of one pip.
A pip applies to all the currency pairs, except for those with Japanese yen (JPY) as the base or the counter currency. In currency pairs with JPY, one pip movement occurs at the second decimal place as opposed to four in regular currency pairs. For example, in the EUR/JPY currency pair, one pip movement will occur if the pair moves from 109.26 to 109.25.
These days, brokers offer fractional pip pricing as well, that is, they will quote a fifth decimal place as well. For example, if the currency pair EUR/USD moves from 1.08085 to 1.08095, it is one pip movement but if it moves from 1.08085 to 1.08095, it will be considered half a movement.
You can covert ticks to pips. One pip is equivalent to 10 ticks. Depending on the currency pair, the pip value varies significantly. If USD is fixed as the counter currency, the pip value is fixed at $10 per $100,000 traded. If USD is the base currency or if the trader is not using USD at all, the pip value or the forex point value will fluctuate.
Terms and their Markets
While points, ticks, and pips are all trading terms and have the same purpose, to describe price movements, they have different their particular markets. We use points and ticks in the futures market and pips in the forex market. The trading point meaning is very subjective. Stock traders liberally use them out of context as well. They usually use the term ‘points’ to describe the movement of dollars in stocks. The term ‘tick’ is used to define the movement in the tick charts. This is not even a monetary movement.
Thus, we can say that while these terms have set definitions, brokers and traders use them as they please which can easily confuse a new person!
