What are ticks, pips, and points in Forex and futures trading?
Ticks, pips, and points are three of the most important terms for prospective traders to learn and understand. These are the terms that are used to describe price changes in the various financial markets. A tick represents the smallest possible change on the right side of the decimal point. A pip is shorthand for ‘point in percentage’ and is similar to a tick. It represents the smallest possible price change right of the decimal point as well. However, a point differs slightly as it represents the smallest possible change in price on the left side of a decimal point.
Ticks are very commonly referenced in futures trading. The tick is indicative of the smallest possible price movement is right of the decimal. This means that there is not necessarily any standardized amount across various markets, as the market can choose to set the minimum price movement at any amount that they please. The movement value of a tick is called the tick value. If we look at the tick value in trading S&P 500 Mini, crude oil, and gold, they are all different from one another.
- S$P 500 tick value: 0.25
- Oil tick value: 0.01
- Gold tick value: 0.1
The term ‘pip’ is commonly used in Forex trading. One pip is indicative of the smallest price move an exchange rate can make. It is determined by market conventions, and is always right of the decimal point. Typically, currency exchanges use four decimal places (0.0001), so the smallest change would be in the fourth place or 1 percent of 1 percent. Nowadays, however, there are also forex brokers who offer fractional pip pricing that gives the option to extend out to the fifth decimal point.
The amount of money that is associated with a change in pip(s) is completely determined by the currency pair in question. For example, let’s look at the pip value of USD/JPY (US Dollar is the base currency and Japanese Yen is the quote currency). We generate a hypothetical value, and say that they are currently trading at an exchange rate of 100.01. If the exchange rate moves to 100.02, it moves one pip higher, but it is important to remember that the pip value changes with the exchange rate.When the USD/JPY exchange rate value increases, the pip value of the US dollar decreases as a result of the currency devaluation of the Yen.
Lastly, a point refers to the left side of a decimal point, and is the largest price change of three measurements. A point is usually made up of thousands of ticks. Usually, the term ‘points’ is used by of traders to describe price changes in their markets. Specifically, it is used when describing the changes in prices in futures markets and is created by the exchange setting dollar values to correspond with movements in various instruments. Occasionally, you will also hear individuals who trade in the stock market use the coined term point in order to describe how many dollars a stock has moved up or down.