What is Tick Trading? Meaning & How Does it Work?

You might have heard about traders creating positions at the­ smallest level of price­ shift and making numerous profitable trades throughout the trading session. These small price change­s offer multiple profit opportunities to experienced trade­rs. The concept of tick trading might seem simple, but it requires a deep knowledge of market behavior, technical tools, and trading strategies.

In this blog, we will learn about the concept of tick trading, why every tick is important and how quick decisions can determine profit or loss.

What is Tick Trading?

A tick is the slightest price change possible for a financial instrument on an exchange. The movement can be upward or downward based on whether the price rises or falls. Experienced traders can capitalize on these small price movements to make profits. 

This approach is favoured by high-frequency traders as the­y aim to gain from quick price fluctuations without holding positions overnight. The concept is popular in volatile markets due to frequent price changes that create many trading opportunities.

Example of Tick Trading

Consider a share ABC, which is currently trading at ₹2,500 per share. Assuming the tick size for ABC is ₹0.05, which is common for Indian stocks, here is how a tick trader might operate:

ABC is trading at INR 2500, and the price rises to INR 2500.05 (first tick); a tick trader will buy 100 shares anticipating further upward movement, and the price continues to rise to INR 2500.10 (the second tick).

The trader expecting reversal might sell their 100 shares at this point, realizing a quick profit of ₹5 (₹0.05 per share * 100 shares).

Tick size influences how prices are quoted, the liquidity of the financial instrument, and the overall ease of executing trades. Tick size is generally ₹0.05 for equities and ₹0.0025 for currency futures on the NSE (National Stock Exchange).

Components of Tick Trading

The key components used while tick trading are:

• Tick Charts: Tick charts show price movements according to a set number of trades rather than time. For example, a 100-tick chart updates after every 100 trades, providing a clear view of market activity regardless of time. These charts help identify intraday trends and entry/exit points in volatile markets.
• Liquidity: For tick trading, liquidity is vital as it pave­s the way for swift trade­ execution without much slippage­. Stock futures and forex markets with high trading volumes are considered optimal for tick trading strategies. 
• Volatility: Price changes ne­cessary for tick trading are gene­rated by volatility. While stocks with high volatility offer more­ chances for profit, they also bring in higher risk.
• Trading Platforms and Tools: Tick trading requires advanced platforms that can process large amounts of data in real-time. Tick charts, order flow indicators and in-depth market data are crucial for making informed decisions.
• Order Types: In tick trading, the se­lection of order types like­ limit, market, and stop-loss orders are crucial. The­ choice is dictated by the trader’s plan and their comfort level with risk.
• Risk Management: Effective risk management strategies are essential because of the fast pace of tick trading. This involves setting stop-loss levels, using suitable position sizes for trades, and avoiding excessive trading.

How Does a Tick Trading Work?

Tick trading starts with choosing the right market and financial instrument. Traders usually focus on liquid and volatile markets like forex, futures or stocks. Traders use tick data to identify trends, analyze chart patterns and assess market sentiment.

These traders generally use well-defined strategies to take advantage of small price movements. Some common methods used by the traders include,

• Scalping: A trading strategy where traders execute many trades in a small interval of time to profit from small price changes.
• Breakout trading: It involves identifying and trading when prices move or break out beyond certain levels.
• Momentum Trading: When a trader trades in the direction of strong price trends, it is known as momentum trading.

After recognizing trading opportunities, trades are executed quickly with advanced platforms. However, high-frequency trading uses algorithms to automate trading. Tick traders constantly track their positions and market trends, and they may adjust their strategies or exit positions depending on the evolving market dynamics. Additionally, strong risk controls are enforced to avoid major losses. This involves setting stop-loss levels and not risking too much on one trade.

Advantages of Tick Trading

The advantages of tick trading are:

• Frequent trading opportunities: Tick charts offer many trading opportunities throughout the day because of their short time frame.
• Possibilities for quick profits: Tick trading enables traders to profit from small price changes and make quick gains.
• Minimized overnight risk: Tick trading usually involves intraday positions, thereby eliminating the risk of holding trades overnight.
• Real-time market insights: Tick size provides real-time market insights, enabling traders to make better trading decisions.

Risks of Tick Trading

The risks involved in tick trading are:

• High-stress levels: Tick trading can be mentally exhausting and stressful for traders because tick trading typically takes place in volatile market conditions.
• High transaction costs: Frequent trading often results in high transaction costs, which increase the brokerage fees and slippage and ultimately erode the potential profits.
• Steep learning curve: Tick Trading is complex and needs a strong grasp of market dynamics and technical analysis, which can be difficult for beginners.
• Risk of overtrading: The plethora of trading opportunities may attract traders to overtrade, resulting in losses.
• Dependence on technology: Tick trading requires advanced technology and infrastructure. Technical glitches can result in missed opportunities or losses.

Suggestions for Executing Successful Tick Trades

You can follow the below-mentioned steps to successfully execute tick trades.

1. Use a demo account to practice tick trading and learn the dynamics without risking your real money.
2. Focus on a few financial instruments to build expertise and prevent burnout.
3. Consider trading through a reliable platform with advanced trading tools for tick analysis and execution.
4. Don’t pursue unrealistic profits. Focus on being consistent and managing risks.
5. Keep your emotions in check and follow the trading plan without making impulsive decisions.
6. Markets evolve, and so should your strategies. Stay updated on market trends and adjust your approach when needed.

Conclusion

To conclude, tick trading is an advanced trading strategy that can provide high rewards for skilled and disciplined traders. Tick traders exploit market inefficiencies while focusing on small price movements, leveraging advanced trading tools and strategies. Nonetheless, the approach comes with several challenges, such as high transaction costs and increased stress, and requires advanced technical skills. With the right mindset, thorough preparation, and discipline, tick trading can become a rewarding pursuit in financial markets. It is advised to consult a financial advisor before trading.

Frequently Asked Questions (FAQs)