What a pip is

Where the pip sits in the quote 

A price is a number, and a number has places. The pip is a name for one of those places: the one a market's convention treats as a single step of the price. It is a unit of distance along the quote, in the same way that a millimetre is a unit of distance along a ruler. It is not an amount of money and it is not a percentage.

In the currency pairs quoted to four decimal places, the pip is the fourth decimal, one ten thousandth of a unit of the quote currency. A price whose fourth decimal is one higher than another price of the same pair is one pip higher. Pairs quoted against the Japanese yen are the standing exception, for an ordinary reason: a yen quote carries far fewer decimal places, because one unit of the quote currency is worth far less, so the convention counts in the second decimal, one hundredth of a yen, instead.

The useful generalisation is not about decimal places at all. Every instrument has a conventional unit of movement, published in its own specification, and the pip is the name that unit carries in the currency markets.

The extra digit on the end 

Most platforms print one more digit than the convention counts in: a fifth decimal on a four decimal pair, a third on a yen pair. That last digit is a fractional pip, usually called a pipette, and it exists because pricing became finer than the convention that named the pip. Quoting a tenth of a pip lets a price improve by an amount smaller than the historical unit, which is also why the digit is often displayed smaller or raised.

The digit changes nothing about the definition and everything about reading a screen. The pip is still the place the convention counts in, so on a display that prints the fractional digit the pip is the second place from the right rather than the last. A distance that looks like a large number of steps on screen is a tenth of that number of pips, and confusing the two counts is the most common arithmetic error in this part of the subject.

A pip, a point and a tick 

Three words describe increments, and they are not synonyms, although traders often use them as though they were. The disagreement is genuine, and it is worth stating plainly rather than picking a side.

Point is the most overloaded of the three. In index markets it means one whole unit of the index. In several trading platforms it means the last digit the platform prints, which on a pair displaying a fractional digit is a tenth of a pip, so a distance entered in points is a tenth of the same number entered in pips. In older currency market usage it was a straight synonym for the pip. Same word, three distances, and no central authority reconciles them.

Tick carries two meanings that are easier to separate. In its formal sense a tick is the smallest increment a venue permits a price to change by, the tick size, which is a rule of the venue rather than a naming convention. In its everyday sense a tick is a single update of the price, whatever its size, which is what tick data means when it names a recording of every update rather than a series of closing values. The formal sense is a distance. The everyday sense is an event.

Counting on gold, an index and a shares contract 

Outside the currency markets the word pip is borrowed, stretched, or dropped entirely, and which of those happens depends on the market rather than on any rule.

• Gold quoted against the dollar is where practitioners disagree most visibly. Some firms describe one cent of the quote as a pip, others describe ten cents as a pip, and others avoid the word and state moves in dollars and cents. All three are in current use, which is why a gold move stated as a pip count is unreadable without the definition that produced it.
• An index is quoted in its own points, and the point is the unit that already exists, so the word pip is usually simply absent. A move in an index contract is stated as a number of index points, and the specification states what one point represents per contract.
• A shares contract is quoted in the currency of the listing, so a move is stated in that currency: cents, or pence, or whatever the smallest increment of the listing is. Describing a share move in pips is uncommon, and where it is done it means the smallest quoted increment rather than any fixed decimal place.

Converting a move into a number of pips 

The conversion is one subtraction and one division, in that order, and it does not vary by instrument. The two prices are subtracted to give the distance in the quote's own units. That distance is divided by the pip size of the instrument. The result is a count of pips, and it carries a sign only in the sense that a move is upward or downward: whether that sign is favourable depends on the direction of the position, which is a separate fact the arithmetic knows nothing about.

Where the convention actually lives 

None of the conventions above is set by a standards body. Each is published, per instrument, in that instrument's contract specification, alongside the contract size and the quoted currency. The specification states the increment the instrument is quoted in, and that statement is what a pip count on that instrument means. Where a platform defines a point of its own, the platform's definition governs what a distance entered there means, which is why one stated distance can be two different distances on two screens.

Practitioners disagree about whether the word pip is worth keeping outside the currency markets at all. One tradition keeps it everywhere, on the grounds that a single word for the conventional increment makes distances comparable across a desk. Another argues that the word is precisely what causes the gold ambiguity above, and that stating a move in the quote's own units removes an entire class of error. The practical consequence is the same either way: an increment stated without the convention it rests on is not information, and the specification is where that convention is written down.