The Language of Day Trading Profits
6 of 11 in Series: The Essentials of Getting Started with Day Trading
Like any specialized field, securities trading has a lingo all its own. Because day trading often deals with small shifts in the market, understanding the jargon of tiny price changes is important for any day trader. Profits are discussed differently in different markets, so you're likely to hear some or all of these words, depending on what you're trading:
Pennies: Stocks trade in decimal form, so each price movement is worth at least a penny — one cent. It’s an obvious way to measure a profit.
Pips: A pip is the smallest unit of currency that can be traded. In foreign exchange markets (forex), a pip is generally equal to one one-hundredth of a cent. If the value of the euro moves from $1.2934 to $1.2935, it has moved a pip.
Don't confuse a pip in the forex market with an investment scheme known as PIP, sometimes called People in Profit or Pure Investor. (The fraud also operates as HYIP, for High Yield Investment Program.) PIP has been promoted as a trading system with a guaranteed daily return, but it’s really a pyramid scheme that takes money from participants and returns little or nothing. You can get more information from the SEC’s Web site.
Points: A point is a single percentage. A penny is a point, as is a 1 percent change in a bond price. A related number, a basis point, is a percent of a percent, or .0001.
Teenies: Many securities, especially bonds and derivatives on them, trade in increments of 1/8 of a dollar. Half of an eighth is a sixteenth, also known as a teeny.
Ticks: A tick is the smallest trading increment in a futures contract. It varies from product to product. How much it works out to be depends on the contract structure. For the Chicago Mercantile Exchange’s E-Mini S&P 500 contract, a tick is equal to $12.50, calculated as a 0.25 change in the underlying S&P 500 index multiplied by $50 multiplier. A tick on a Chicago Board of Trade E-Mini soybean contract is $1.25, calculated as 1/8 cent on a bushel of soybeans in a contract covering 1000 bushels. You can get information on the tick size of contracts that interest you on the Web site of the offering exchange.