Are you new to the financial markets or want to increase your trading knowledge? Understanding how ticks work is an important first step. Tick size in trading refers to the lowest potential price movement of an asset, which affects trading methods, market liquidity, and regulatory frameworks.
This article provides a comprehensive understanding of tick size, a crucial aspect for efficient market interaction and decision-making in various trading scenarios.
What are Ticks in Trading?
Ticks are the smallest price movements in a security, influencing trading strategies, market liquidity, and regulatory frameworks.
When buying or selling stocks, the tick size is important because it reflects the smallest amount that an asset can be traded for.
Example: If a stock has a tick size of ₹0.05 and the last traded price is ₹100, the stock’s next bid prices will be ₹99.95, ₹99.90, or ₹99.85.
How a Tick Works
The following tick rates for stocks have been set by the Security and Exchange Board of India:
- ₹1 for stocks that have a market capitalization > ₹10,000 crores.
- ₹0.5 for equities whose market value is ₹4000 crores to ₹10,000 crores.
- ₹0.05 for equities whose market value < ₹4000 crores.
Tick Chart in Trading Tick
A tick chart displays the number of trades or transactions for each bar or candlestick, representing a specific amount of trades regardless of their duration.
Example: A 1,000 tick chart generates a new bar after every 1,000 transactions. You may customise tick charts to the number of transactions you want, such as 10, 100, or 1,000 ticks.
Source: tradingsetupsreview.com
Why to use Tick Chart
- Identifying When Smart Money is Stepping In
It identifies price movements supported by large volumes, smart money trends, and retail investor-driven trends, increasing the likelihood of their reversal.
- Pre-Market and After Hours Smoothing
It displays market trades 24/7, allowing traders to monitor sentiment and activity outside regular business hours.
- Noise Reduction
By focusing on the trading process, tick charts eliminate unnecessary market noise and allow for significantly more precise trend identification.
- Recognise Trend Exhaustion
Tick charts help you predict fading trends by showing fewer bars due to fewer trades and smaller price swings, enabling you to anticipate potential corrections or reversals.
How to Read Tick Chart
- Price Range
The height of a candle indicates the price range of trades, allowing traders to easily determine the intensity of price swings.
- Tick Value Flexibility
Traders can modify tick values to reflect market conditions. With smaller numbers appropriate for volatile markets recording quick price swings, and larger ones for a peaceful period.
- Candle representation
A tick chart shows each candle as multiple deals. Shorter candles represent less price movement, while longer candles indicate higher volatility.
- Pattern Trend
Analyzing tick charts can help you identify breakout and reversal patterns, giving you an edge in anticipating market movements.
Trading Tick Charts Advantages
- Adjust tick values for tailored trading strategies in various market conditions.
- Immediate access to market swings for swift decision-making.
- Ideal for short-term trading like scalping, revealing minute price variations.
- Pinpoint precise entry and exit opportunities based on price action and market momentum.
What is Tick Size in Stock Trading?
Tick size in stock trading refers to the minimum price increment at which securities can be traded. It affects trading strategies by impacting transaction costs, depth of the order book, and price discovery efficiency.
Tick Size in Futures Trading
Tick size in futures trading refers to the smallest price fluctuation that could change a futures contract’s value.
Tick size impacts futures trading margin needs. Smaller tick sizes allow for precise risk management, while larger tick sizes may require more capital allocation due to increased price volatility.
Example: The Nifty 50 Index Futures trading tick size is ₹0.05. If the index price is ₹100 the price could either fall or rise to ₹99.95 or ₹100.05.
Tick Size in Options Trading
Tick size affects options trading methods by influencing the bid-ask spread, pricing efficiency, and the ability to execute trades at the desired price. Traders must take tick size into account when developing options trading strategies.
Bottom Line
Understanding tick size and using tick charts efficiently is crucial for managing the stock market’s complexities, maximising trading opportunities, and achieving financial objectives.
Platforms like Appreciate Wealth simplify this process, avoiding common mistakes, and ensuring the right retirement planning for individuals.
FAQs
How long is 1 tick in trading?
The tick size can range from ₹0.5 to ₹1 as per the National Stock Exchange of India (NSE).
What is the best tick chart setting for day trading?
Day trading typically uses tick sizes of 1000 and 2000 ticks, with the option to test multiple settings to find the most comfortable trading setting.
What does tick size depend on?
The tick size in financial markets is determined by the exchange where the instrument is traded, based on its type, price, and the market it trades in.
Is trading tick good for trading?
Yes, as tick charts provide real-time precision by focusing on trading volume and reducing market noise, making them beneficial for trading.
