In this article we will clarify the difference between pips, points and ticks and what they measure. The points refer to all price changes , in the number to the left of the tenths. The ticks refer to the partial price changes that take place to the right of the decimal point.
Pips are unique in Forex and are used to indicate the spread – or the difference between a given offer price and the demand price. The value of a pip is determined by dividing 0.0001 by the exchange rate for the currency pair in question.
Section 1: Points
This part will deal with how points are used to indicate price changes and give relevant examples in US dollars. The points may have different dollar values dictated by the market and, as such, will show a single change in points, in different markets that have different financial implications.
Section 2: Ticks
It will describe why ticks are useful and how their value varies between markets. It will also discuss the difference between an uptick and a downtick and how they are used as trend indicators.
Section 3: Pips
The idea here will be to provide a background on why pips (Point in Percentage) are unique in Forex, how they are calculated and how they are used in Forex trading. It will give examples that show how pips denote profit / loss on individual FX trades and discuss the benefits of using pips as a Forex measure, rather than using dollar amounts.
The conclusion will point out when markets frequently use each of the above terms and how to understand their relative value in each market.
For those unfamiliar with the financial markets, the words «pips», «points»; and «ticks» may sound like something out of a Dr. Seuss book. But there is a reason why these units of measure exist in the trading vocabulary. In order to assess risk and compensation and understand profit and loss, it is important to know what these terms mean in different contexts.
In the stock market, points represent the total dollar amount by which a given stock or stock index has appreciated or depreciated. In the case of an individual stock, a single point is always equivalent to a US dollar. For example, if a stock fell from $ 53 to $ 48, the change would be expressed
as a five point drop (as opposed to a five-point drop) . So, what you will ask, is the reason for using points?
Although the dollar value of a point remains consistent across different shares, the percentage change in share value that a single point represents depends on the value of the share in question.
For example, if a $ 30 share, ooo fell by three points, those three points represent a mere 0.01 percentage drop in the share’s value (3 / 30,000 x 100). In contrast, if a $ 10 share is about to fall by three points, that same three-point delta will drop the share value by 30 percent.
In the context of a stock index, that is, a stock collection, a single point change does not necessarily represent a dollar change in the market. In other words, a single point drop in the Dow Jones Industrial Average does not mean that all 30 stocks in the index fell by a total sum of one dollar.
In fact, some stocks in the index may have appreciated, while others fell by several amounts. Instead, a Dow point represents a change of one dollar, in the weighted average of the share prices for the index. Because stock indices typically include a variety of high-priced stocks, the use of points instead of dollars allows price changes to be communicated more succinctly, with an emphasis on collective performance.
To compile things even more, there is a whole set of additional “points” to keep in mind, regarding the financial market. In bond trading, for example, a single point represents a one percent change in the bond’s value. Accordingly, the dollar value of a point is subject to change, as an obligation increases or decreases in price. In the context of futures contracts, a single point is equal to two percent of a cent, or $ 0.0002.
A tick is a partial change in the price of a stock or bond that is less than a dollar and as low as a cent. The tick value, or tick size, is used to establish a minimum increment, by which price changes can be measured, in a given market. Although the different markets have different tick sizes, once this tick size is established, movements to increase the price below this threshold cannot be registered. For example, if a stock’s tick size was $ 0.10, a change of $ 0.05 will not be reflected in the price moment. Instead, the share price would rise or fall in multiples of $ 0.10, moving from $ 40 to $ 40.10, $ 40.20, and so on.
In stock trading, ticks can also be used to indicate the direction the closing price has taken, in relation to previous transactions. In this context, an uptick is used to describe a price increase and a downtick refers to a reduction in the trading price.
Prior to 2017, the uptick rule created by the SEC stipulated that all short-term sale transactions (example: when a trader expects the price to decrease and lends an asset, in the hope of selling it and repurchasing it at a price lower) are made at a price higher than the previous ticks. The purpose of this original uptick rule was to prevent short-term traders from being able to collectively devalue the share price.
In 2010, the SEC replaced this rule with the alternative uptick rule , which applies only when the price of a share has fallen by 10 percent, within the space of a single day. Once this 10 percent loss threshold has been reached, the alternative uptick rule offers trading precedence to sellers who take a long position, thereby restricting short-term selling, to combat downward market pressure .
Pips (percentage points) are unique to the foreign exchange market (Forex) and measure the partial price changes of currency pairs. In Forex, most currency pairs are priced up to three thousandths (four digits after the decimal point).
Like a tick, a pip represents the lower increment, or base point, at which a currency pair may rise or fall in price. Because pips refer to currency pairs, rather than a single stock or security, their value reflects the relationship or spread between the two currencies in question.
After a currency trader enters a position, profits and losses are expressed in terms of pip movement, relative to that position. For example, imagine that a trader uses euros to buy US dollars, anticipating an appreciation of the relative value of the dollar against the euro. If that trader bought dollars at a rate of € 1.6740 per dollar and sold his dollars (thus leaving the trade) at a rate of € 1.6765 per dollar, his profit would be equal to 25 pips.
The value of these 25 pips depends on the USD amount the trader has purchased. In other words, if they only bought one USD, a profit of 25 pip would equal only a few fractions of a euro. In contrast, if they bought four million USD (at a cost of € 6,696,000), a profit of 25 pip would mean that they received € 6,706,000, thus earning a profit of € 10,000.
Before executing an operation, make sure that you understand the meaning and value of the points, ticks or pisp, related to the market and operation in question. Armed with this knowledge, you will be equipped to interpret the financial implications of market movements and weigh risks, offsets, profits and losses with greater precision.
Valutrades is an industry-leading Forex, CFDs, Crypto and Commodities broker based in London. Sign up for Valutrades to learn new trading strategies and stay up to date with the latest financial news affecting markets