The Language of Trading: Pips, Points, and Ticks Defined

To speak the language of the market, we must first define our terms. In the stock market, we talk in cents and dollars. If Apple stock moves from $150.00 to $151.00, it moved $1.00. In Forex, because we are dealing with exchange rates that move in fractions of a cent, we use a more precise metric: The Pip.

**1. WHAT IS A PIP?**

'PIP' stands for **Percentage in Point** or **Price Interest Point**. It represents the smallest standard change in a currency pair's exchange rate (historically).

For most major pairs (EUR/USD, GBP/USD, AUD/USD, USD/CAD), a Pip is the **4th decimal place** (0.0001).

* **Example A:** If EUR/USD moves from 1.105**0** to 1.105**1**, that is a **1 Pip** rise.
* **Example B:** If GBP/USD moves from 1.30**50** to 1.30**40**, that is a **10 Pip** fall.

This is the standard unit used to calculate your Profit and Loss (PnL). When a trader says, "I caught a 20 pip move," they are referring to this 4th decimal shift.

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**2. THE YEN EXCEPTION (The 2nd Decimal)**

The Japanese Yen (JPY) is the major exception to the 4-decimal rule. Because the Yen is much lower in value relative to the Dollar (it takes roughly 100+ Yen to buy 1 Dollar), Yen pairs are only quoted to two decimal places.

For any pair ending in JPY (USD/JPY, GBP/JPY, EUR/JPY), a Pip is the **2nd decimal place** (0.01).

* **Example:** If USD/JPY moves from 109.**50** to 109.**51**, that is a **1 Pip** rise.
* **Example:** If EUR/JPY moves from 130.**05** to 129.**95**, that is a **10 Pip** fall.

**Common Mistake:** Beginners often look at the 4th digit on a JPY pair and think they made 100 pips, when in reality, they made 1 pip. Always check if JPY is the quote currency.

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**3. THE PIPETTE (The Fractional Pip)**

Technology has made the market more efficient. In the old days of manual floor trading, 4 decimals were enough. Today, with High-Frequency Trading (HFT) and ECN brokers, pricing is ultra-precise. Brokers now quote to the **5th decimal place** (or 3rd for JPY pairs).

This extra digit is called a **Pipette** (or fractional pip). It is equal to **1/10th of a Pip**.

* **Quote:** EUR/USD 1.1050**5**
* **Breakdown:** 1.10 = Handle, 50 = Pips, 5 = Pipette.

If the price moves from 1.1050**5** to 1.1050**6**, it moved 1 Pipette (0.1 Pips).

**Why does this matter?** It allows for tighter spreads. Instead of a broker charging you a full 2 pips spread, they can charge you 1.5 pips. When you see a spread of '12' in your MetaTrader terminal on a 5-digit broker, it usually means 1.2 Pips, not 12 Pips.

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**4. CALCULATING PIP VALUE (The Money Math)**

Knowing how far the market moved is useless if you don't know what that move is worth in your account currency (usually USD). Pip Value is determined by three things: The Currency Pair, the Exchange Rate, and your Lot Size.

**Standard Lot (100,000 units):**

* **Scenario A: USD is the Quote Currency (EUR/USD, GBP/USD, AUD/USD).**
This is the easiest math. If the USD is the second currency listed, a Standard Lot always pays **$10 per pip**.
* Trade: Buy 1.00 Lot EUR/USD.
* Move: +50 Pips.
* Profit: 50 * $10 = $500.

* **Scenario B: USD is the Base Currency (USD/CAD, USD/CHF).**
Here, the pip value is floating because the profit is generated in the quote currency (CAD or CHF) and must be converted back to USD.
* Formula: (0.0001 / Exchange Rate) * Lot Size.
* Approximate Value: usually between $7.50 and $9.50 per standard lot, depending on the rate.

* **Scenario C: Cross Pairs (GBP/JPY, EUR/GBP).**
These are the most volatile in value. EUR/GBP currently pays roughly $13 per pip per standard lot because the Pound (Quote currency) is stronger than the Dollar. This means a 50-pip loss on EUR/GBP hurts more than a 50-pip loss on EUR/USD.

**Pro Tip:** You do not need to calculate this manually during a trade. All modern trading platforms (TradeWise, MT4, cTrader) calculate this automatically. However, you *must* be aware that **not all pips are created equal**. Risking 20 pips on GBP/NZD is a different dollar amount than 20 pips on AUD/CAD.

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**5. POINTS VS. TICKS (The Asset Class Confusion)**

If you venture outside of Forex into Indices or Commodities, the terminology changes. Using "Pips" to describe the Dow Jones is technically incorrect and marks you as a novice.

**Indices (The Point):**
When trading the S&P 500, NASDAQ, or DAX, we measure movement in **Points**.
* If the S&P 500 moves from 4000.00 to 4001.00, that is **1 Point**.
* Note: The dollar value of a point varies wildly between brokers. On one CFD broker, 1 point might equal $1. On a Futures contract, 1 point might equal $50.

**Futures & Commodities (The Tick):**
In the futures market (e.g., Crude Oil, Gold futures), the smallest possible price movement is called a **Tick**.
* For Crude Oil, a Tick is usually 0.01.
* For Gold, a Tick might be 0.10.
* You calculate profit by knowing the "Tick Value" assigned by the exchange.

**Gold (XAU/USD) in Forex:**
Spot Gold is unique. Most traders count movement in **cents** or **dollars**.
* $1800.00 to $1801.00 is a $1.00 move.
* Some traders call this "100 pips" (treating 0.01 as a pip), while others call it "10 points." It is ambiguous. At TradeWise, we simply refer to Gold moves in Dollar amounts to avoid confusion.

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**6. THE SPREAD: The Cost of Doing Business**

The **Spread** is the difference between the **Bid** (Sell price) and the **Ask** (Buy price). It is measured in Pips.

* Ask Price: 1.1052
* Bid Price: 1.1050
* Spread: 2 Pips.

When you click 'Buy', you are entered at the Ask (1.1052). If you immediately try to close the trade, you must sell at the Bid (1.1050). You are instantly down 2 pips. This is why you start every trade in the negative (red). You must "cross the spread"—the market must move 2 pips in your direction just to break even.

**Institutional Insight:** During major news events (NFP, CPI), spreads can widen dramatically. A 1-pip spread on EUR/USD can explode to 20 pips in milliseconds. If you are trading with tight stops during news, the spread alone can trigger your Stop Loss even if price didn't technically hit your level on the chart. This is why we advise beginners to avoid trading during high-impact news releases.

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**7. PRACTICAL APPLICATION: Position Sizing**

Why does all this math matter? **Risk Management.**

Let's say you have a $10,000 account and you want to risk 1% ($100) on a trade. Your technical analysis tells you the Stop Loss needs to be 20 pips away.

How big of a trade do you put on?

1. **Risk Amount:** $100
2. **Stop Loss Distance:** 20 Pips
3. **Pip Value Needed:** $100 / 20 pips = $5 per pip.

If you are trading EUR/USD (where 1 Lot = $10/pip), you need half that size.
**Trade Size = 0.50 Lots.**

If you didn't know the math, you might have opened 1.00 Lot, meaning a 20 pip loss would cost you $200 (2% risk). Over time, these calculation errors compound and destroy edges.

**CONCLUSION**

Trading is a business of numbers. The chart provides the picture, but Pips provide the score. Before you move to the next lesson on Leverage, ensure you are comfortable looking at a price quote and instantly identifying the Pip, the Pipette, and the Spread. In the chaos of a live market, you won't have time to pull out a calculator.