The term pip and point are very popular words used in the financial market especially in Forex Trading. Though it is used in the stock market and other markets, investor rarely bother themselves since other market do not move as rapid as the forex market.
I sometime ago saw a Forex Trader who was mistaken “point” for “pip” and he was boasting of making 4000 pips in two minutes, unfortunately making people fell for his ignorance.
There are many people who fall for this, do not know how to calculate points or pips, before we proceed further let us explain what each term means (pip and point). Although I have explain about pips in the educational series but I will still try my best to explain it better
CHECK THIS OUT: How to Invest In the Financial Market
What is Pip?
The term pip stands Percentage In Point, which also equals one hundredth of a percentage (when you divide a percent that is 100 into 100 parts). Since a pip is extremely small and usually not put into consideration, in market such as stocks or commodity, there price movement are not measured in pips but in the case of currency trading they are measured using pips.
What Is A Point?
Points are the smallest unit of price change, point are one thousandth of a percentage. Point became widely used when brokers were forced to start using the fifth decimal pricing system.
On other market such as commodity, bonds etc. A point in price movement is so small that it cannot be noticed that is why they are not used in such markets.
Pips in Currency Trading
The Stock Market moves in an aggressive manner, which is why speculation in stocks is a bit difficult. However, in forex the price movement is rather mild and trendy. In stocks or commodities, the smallest price movement will exceed the value for point or pip. For example, a stock valued at $100 might move in a dollar increment and may sometimes move in an increment of $10 or have numerous gaps.
However, in currency, the moves are very small for example, EURUSD, which is trading at 1.20900, might move to 1.20901, which is just 1 point movement, or it may move from 1.20900 to 1.20910 which is 1 pip movement.
That explain why Forex Trading is much leveraged because you need a huge sum of money to trade and make a reasonable amount of profit (Read What Is Leverage in Forex Trading to understand how leverage work in the forex market).
Let us recap about pips and point so that in case you did not understand anything earlier you will probably understand now. Pips are used mainly by Forex Traders because of how price move in the currency market and it is denoted by the fourth digit after the decimal point to the right. Depending on the size of the leverage and lot size used, a pip in price movement might show a profit ranging from $10 down to $1 or even ¢1 or ¢10 (cents).
Points are totally different and are sometimes not put into consideration because it is the smallest movement of price in a currency. Point are not shown on forex chart but are requested by regulatory bodies to always show traders, the point in a currency quote which brought about the fifth digit pricing system in forex trading.
Points are the last digit on a currency quote for example EURUSD is trading at 1.20900 and move to 1.20901 that is consider a point movement and is very small that most traders do not even put it into consideration but rather it is used to show how the price of currency move.
Do you have any questions please comment below I would love to hear from you.