The terms of pips and points don’t have any complicated definitions. However, beginners often confuse them if they don’t find out the most crucial difference between these concepts. They might also be confusing because of their use in other markets except for forex. In the stock market, for example, the meaning of points is different. So let’s find out all the pitfalls to avoid further mistakes.
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Introduction to points in Forex
Points refer to the last decimal places of the Forex prices. They determine the highest precision. For instance, let’s consider that the precise GBP/USD price is 1.1757. If it decreases to 1.1756, we will say that it lost one point.
The trick here is that the majority of forex brokers don’t represent such points. As a rule, JPY pairs are represented with not more than 3 decimal places. We will explain how to deal with it later. Now, let’s find out the difference between points in currency pair prices and points in prices of stocks, indices, and commodities futures.
What is the difference?
The main thing you should consider here is the fact that points in stocks or indices don’t refer to decimal places. In stocks and indices, traders deal with “full points” as points refer to whole numbers. For instance, if the TSLA stock price moves from $184.00 to 194.00 we say that it gained ten points. The same rule is applied to indices.
Basically, this is everything you need to know about points at the beginning. But why are they often confused with pips? Here is the answer.
Introduction to pips
The meaning of pips in Forex is the “percentage in point”. This term isn’t used beyond forex trading, so it’s easier to define it more clearly. Pips also indicate price fluctuations in Forex currencies. However, unlike points, they aren’t as precise – one pip equals 10 forex points. For example, if somebody says he’s going to benefit from the movement of 10 pips, he expects that the currency pair will grow 100 points. However, there is one aspect you should pay attention to.
Here we come back to how different brokers define the prices of Forex currency pairs with different decimal places.
5 vs 4 decimal places
In most cases, forex brokers have forex currency pairs prices with five decimals. For instance, you can explore that the GBP/EUR price is 1.14052. Pairs with JPY are the only exceptions. However, some forex companies might offer prices with only four decimals. In this case, the GBP/EUR price would look like 1.1405. This can confuse a lot of traders, especially the beginning ones.
The thing you should know is that when the price with four decimals moves, it gains or loses pips but not point. For instance, if the GBP/EUR moves from 1.1405 to 1.1404, we would say that it lost one pip. To understand it better, you should imagine that there are five decimal places and add 0 at the end. The price will look like this – 1.14050. So when it falls to 1.4040, it moves 10 points, which is one pip. This becomes simpler if you keep in your mind that 10 points = 1 pip.
3 vs 2 decimal places
As we’ve already mentioned, the majority of brokers show the JPY currency pairs with 3 decimal places. For example, the GBP/JPY price is 163.964. However, similar to the previous case, some companies can put away the last decimal case and cut it to 163.96. This doesn’t change things. If it moves to 163.97, it will be one pip. This works the same way as with other currencies – you just add 0 and consider that 10 points = 1 pip.
Key takeaways from this guide
In the end, let’s summarize everything we learned from this article:
- In Forex, points refer to the last figures in the prices with five decimal places.
- In stocks and indices, points refer to whole numbers.
- In Forex, 10 points equal one pip.
Thanks for reading! We hope that this guide will help you to avoid the most common pitfalls when trading online.