In modern trading platforms like MetaTrader 4 (MT4) or MetaTrader 5 (MT5), understanding how price movements are measured is essential for calculating trading costs and profit margins. While the terms Pip and Point are often used interchangeably in casual conversation, they represent distinct units of precision within a financial instrument's quote.
Core Definitions of Pips and Points
Pip (Percentage in Point)
A Pip is the standard unit of measurement for price movements in forex and commodity trading.
In most major currency pairs, a Pip represents the fourth decimal place (0.0001).
In Gold (XAUUSD) trading, a Pip typically corresponds to the first decimal place (0.1 USD).
Point (Pipette/Fractional Pip)
A Point is the smallest possible price change in a digital trading environment. It represents the final digit in a five-decimal forex quote or a two-decimal Gold quote. One Point is exactly one-tenth (1/10) of a Pip.
Relationship and Practical Differences
In the current high-precision trading environment, there is a fixed conversion ratio between these two units: 1 Pip equals 10 Points.
Role of Pips: Pips are the standard language for traders to communicate targets. They are used to calculate "Pip Value," set Stop Loss levels, and define Take Profit objectives.
Role of Points: Points provide a higher level of quote accuracy. Brokers introduced Points to offer tighter spreads and more transparent pricing, allowing the software to record the most granular price "ticks."
Practical Calculation Example: Gold (XAUUSD)
To illustrate the difference, consider a Gold quote where the Sell price is 5116.07 and the Buy price is 5116.44.
Calculate the Price Difference: Subtract the Sell price from the Buy price (5116.44 minus 5116.07) to get a raw difference of 0.37 USD.
Convert to Points: Since the smallest decimal in a Gold quote is 0.01, the 0.37 USD difference contains 37 minimum price units. Therefore, the spread is 37 Points.
Convert to Pips: Using the 10-to-1 ratio, divide 37 Points by 10. The standard spread for this transaction is 3.7 Pips.
Evolution of Trading Units
Early trading systems utilized 4-decimal quotes for forex and 1-decimal quotes for Gold. In that era, the Pip was the smallest possible movement. As technology advanced, brokers introduced a 5th decimal (for forex) and a 2nd decimal (for Gold) to provide more competitive pricing. This "fractional pip" became known as the Point, moving the level of precision from "centimeters" to "millimeters."
Contact Support
If you require further assistance regarding spread calculations or platform settings, please reach out to our technical support team:
Email: [email protected]
Live Chat: Available 24/5 via the Help Center portal.
Technical Documentation: Visit our official User Guide for more advanced calculation formulas.