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What is a point and a pips in trading

pips point

The trader’s profession is rich in unique internal slang. However, if everyone is familiar with bulls, bears, and moose, many beginners are often confused with point and pips. First of all, it has to do with the fact that most professional traders grew up with old literature, while today newcomers face new technological progress reflected in the accuracy of quotes. That’s why in today’s article we will tell you what a pip is in trading, how a pip is calculated in Forex and we will also show you how much a point and a pip differ from each other.

What is a point and how does it differ from a pip

On the Forex market, as well as other exchanges, where securities, currencies, or any other derivative assets are traded, a point is usually called the minimum change in price. To understand how this looks illustratively, we suggest considering how an average quote looks like, for example, the currency pair EURUSD. Let’s assume that the current value of the quote is 1.2180. We can observe that it consists of an integer number as well as the value after the dot.

The last digit is the point value. For example, the price of the quote has risen and became 1.2185, which means that the market went up by 1.2185-1.2180=0.0005, which will be equal to 5 points. One point equals 0.0001. By the way, an interesting situation is formed with the currency pairs, where there is a Japanese Yen. Because of the fact that it has fallen sharply in value after the Second World War, and the government does exactly that – it lowers rates, for convenience of calculations the standard with two digits after the decimal point was adopted, so the point will be equal to 0.01.

It is important to note that the point as a term applies to quotations with four decimal places. However, after the emergence of five-digit quotes was introduced such a term as “Pips”.

Pips is also a minimum change in price, but for five-digit quotes. If converted into the numerical value one pip equals 0.00001 against 0.0001 of a point. However, traders often perceive these two terms synonymously, which is why on many trading forums and chat rooms there are such a concept as old and new points. Accordingly, the old point has four decimal places, while the new one has five. Such definition helps the author to express his thoughts more precisely, without confusing beginners and professionals.

It is important to understand that the pip in trading is one of the main units of price movement, and consequently, on its basis traders calculate their goals and potential profit.

Five or four digit quotes

Pips are the result of the progress of liquidity providers, market makers, and brokers, who in the struggle with each other for a potential client are actively improving trading conditions. One of the directions is the accuracy of quotations, which allowed traders to get lower commissions.

The thing is that if we talk about four decimal places, the brokerage companies often rounded the last figure, not in the direction of the trader. For example, instead of providing the trader a price of 1.88676, the broker rounded it up to 1.8868. As a consequence, you overpay in the spread 0.4 points, which after a long period of time becomes a tidy sum.

Thus, if it is important to you not to lose on the overestimated spread, five-figure quotes, in this case, are an obvious choice. However, if a trader needs the spread to be static and not widen, then four-digit trading accounts are offered by many brokers, such as Fort FS.

How to calculate the point value in Forex

As we have already noted, the distance that the price travels is usually measured in points. Firstly, it is practical because it is too many figures and complicated to calculate if we use currency units or exact quotations.

Secondly, from a psychological point of view, it is much easier to take a loss of 30 points than to take a loss of 30 dollars. Thus, when measuring everything in points, it is easier for a trader to abstract from the money, the loss or gain of which causes a strong emotional reaction.

However, point value has practical value as well, because this value is used in risk management. There are two ways to calculate the pip value in Forex:

  • Manually;
  • Automatically.

To calculate the point value manually, you should follow the following simple mathematical formula:

(One point of the quote/the current rate of the asset)*on the volume of the opened position in money.

So, let’s imagine that we decided to open a trade on the currency pair Euro/US Dollar with a volume of 0.5 lots. Since 1 standard lot is 100,000 of the base currency, 0.5 lot would be equal to half of 50,000. Thus, based on the formula, we get the following equation:

(0.0001/1.2180)* 50000 = 4,1 euro.

To determine the point value of cross rates in the currency of your deposit (for example, US dollars), you need to multiply the obtained value by the current price of the main quotation. For example, you need to know the point price of GBPAUD in US dollars for 0.1 lot. The current price of the pair GBPAUD = 1.82504, the price of the pair with the dollar GBPUSD = 1.41569. We get:

(0.0001/1.82504)* 10000 = 0,54 pounds.

0,54* 1,41569= 0,77 US dollars.

Also, the price of a point in Forex can be calculated automatically. To do this, you can use all kinds of information panels in MT4, scripts, auxiliary indicators, as well as resort to calculators, which are often available on the websites of brokers. The latter is convenient to use when it is necessary to calculate the value of one pip on the cross rates. An example of such a calculator from RoboForex broker we recommend:

pips point

The value of one point of price movement is important when calculating a trade’s lot when a trade is opened based on a percentage of risk to capital. Since the SL and TP values in many trading strategies are dynamic, the position volume has to be calculated again each time. As an example, consider a typical situation where a trader trades a $5,000 deposit with 2% risk and an 18 point stop order. This is done as follows:

  1. Find the total value of risk in the currency of the deposit $5,000*0.02=$100 per position.
  2. Calculates the risk based on the value of one point for one full lot with an SL of 18 points. For EURUSD, the value of one point is $10, which means that for a whole lot the risk with a Stop Loss would be 10%*18=180 dollars.
  3. Makes a simple proportion: 1 lot is $180, then X is $100. We need to open a position 100*1/180=0.55 lots.

To avoid performing these mathematical calculations by yourself, you can use the DaVinci Count trading lot script for MT4. Our team developed it specifically for this purpose. Its principle of operation is simple, you just drag and drop the script on the chart and specify the size of your stop order in points and the percentage of risk for one trade in the settings. You will immediately get a notification window, where the information about the position volume will be located. In our example, the recommended lot was 0.01.

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What happens if you confuse a point and a pip with each other

As we have already noted, a pip in trading is analogous to a point, but on five-digit quotes. However, beginners often confuse these notions and use different types of Expert Advisors or strategies with wrong settings. Among typical mistakes we can mention the following ones:

  • Incorrect value of slippage of quotes in the Expert Advisor;
  • Incorrect SL and TP in Expert Advisors and trading strategies.

If we set the slippage value in forex EA from four-digit quotes and use it on five-digit ones, a huge number of deals will not be opened on the live market during the volatility growth period. As a consequence, the strategy will not work efficiently.

If you trade on five decimal places but use an EA with values of profit and stop orders in points, the actual value of SL and TP will be ten times less than necessary. By the way, a lot of grid and martingale-based robots also require setting the distance between orders, which is usually in points instead of pips.

Therefore, in this situation, you should read in the help or ask the author of the Expert Advisor how the data is calculated in pips. Also, many professional MQL4 programmers include in their code the automatic function of determining the number of decimal places, and depending on this, they correct the value from the settings.

By the way, all of our Expert Advisors and indicators are configured exactly in points (old points) and automatically recalculate the value for accounts with five digits. We prefer points because it is a kind of tribute to the classics. 

Finally, it should be noted that there is a 10-fold difference between a point and a pip, so if you confuse the two definitions, you will pay a penny in trading. It’s important to remember that knowing the point value you can always correctly calculate the value of your potential profit or loss in your account and thus not violate the money management in your trade.

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