Tick trading is a method employed by short-term participants who tend to make their trading decisions based on small, incremental changes in prices, which are referred to as ticks.
Tick trading is a method employed by short-term participants who tend to make their trading decisions based on small, incremental changes in prices. Traditional investments depend on longer timeframes or fundamental analysis, but rather than looking back at long-term trends, tick trading centres on details regarding small price fluctuations made within a matter of minutes and seconds. Typically, this method is adopted in liquid markets such as futures, forex, and stocks.
What Is a Tick?
A tick is defined as the smallest possible price movement throughout the trade of an instrument. For instance, if a stock moves from $100.00 to $100.01, that one-cent change is a tick.
In futures markets, each contract has its own tick size and tick value. These measurements allow traders to calculate gains or losses per movement and determine appropriate entry and exit points.
It is essential to understand tick size and tick value in tick trading. Tick size means the minimum change in price, and tick value is the monetary value gained or lost with every tick. Knowing these values allows traders to assess risk and reward before entering a position.
Use of Tick Charts
Tick charts are not to be confused with an ordinary time-based chart. Unlike the latter, which shows price data at regular intervals (like minutes or hours), tick charts plot a new bar after a specified number of trades or ticks have occurred. A 100-tick chart will show a new bar after every 100 trades.
Tick charts provide an alternative view of the market. They are used by traders to look for near-term patterns, reversals, and levels of support and resistance.
Because tick charts are based on market activity rather than time, they can give insight into periods of high volume when price movements are most active.
Tools for Tick Trading
Tick trading requires tools for real-time data and speedy execution. Traders choose platforms that provide customizable tick charts, Level II market data, and order types. Enlisting a direct market access (DMA) broker is an added advantage since it minimizes the lag between the placement and execution of orders.
Indicators commonly used in tick trading include moving averages, Bollinger Bands, volume indicators, and momentum oscillators. They help assess market direction and validate entries and exits.
However, since tick trading is so time-sensitive, indicators are often of secondary importance in decision-making compared to price action principles.
Tick Trading Strategy
Tick trading is characterised by several strategies, each with unique sets of rules and setups. Scalping is one of those approaches. The primary purpose of scalpers is to enter and exit several trades in one trading day, looking for profits on small price changes. Because of the slim margin available, accuracy in execution and speed of decision-making are critical.
Risk Management
Risk management can be done through position sizing, which involves only risking a small percentage of capital on any one trade. This limits the amount of capital exposed to unfavourable price moves. Stop-loss orders, which may be set to close a trade automatically at a specified dollar amount loss and thereby prevent any further erosion in value, represent another risk-management tool.
Market Conditions and Timing
Market conditions in tick trading are all about liquidity and volatility. High volumes at the open and close of markets present opportunities for tick traders to capitalise on frequent price fluctuations, but with much risk from jerk moves.
Tick Trading Psychology
Emotional powers are vital to the success of any trader. Tick trading, being fast-paced, needs mental alertness to grab the moment and sustain patience while enduring an extraordinary level of stress.
Greed and fear often come into the scene as motivation for sidelining objective thinking, with so many intuitive decisions opposite the trading plan.
Starting Up An Account
Beginners should open a demo account. This allows practice without putting any money at risk. Once traders feel they know the platform and strategy, they can switch to a live trading account with a very small amount of real capital.