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What is Tick in Securities Trading - How Does It Work

stock market
26 Aug 20246 mins readBy MOFSL

Introduction

When exploring the realm of securities trading, you will encounter various terms and concepts that might initially seem complex. One such term is "tick," which is crucial in understanding price movements. A tick represents the most minor change in a security’s price, upward or downward. A clear grasp of a tick and its functions can significantly impact your trading decisions.

What Is a Tick in Trading?

A tick is the minimum increase or decrease in the price of a security. It offers an accepted standard for measuring price shifts and market sentiment. It is quoted as the smallest price change between a security’s bid and ask prices. Trading strategies are influenced by the tick size through its effect on trading costs, price discovery efficiency, and depth of order book. Thus, tick size needs to be factored when identifying entry and exit points in the market. Ticks are used as a standard unit of measurement for changes in prices that help traders and investors quantify and measure small amounts of money. Ticks serve as units with which to gauge sentiments of markets and examine changes in prices. In addition, knowledge about tick size—the value associated with each tick—shows how fine-grained or actively traded is any given security.

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Characteristics of Tick Size

Tick size exhibits several notable characteristics:

  • Minimum Price Movement: It represents the most minor possible price change for a given security.
  • Importance for High-Priced Securities: Tick size is particularly significant for higher-priced securities, where even small price changes can have substantial implications.
  • Impact on Profitability: The tick size can affect the profitability of trades, influencing how traders approach their trading strategies.
  • Variation by Security: Tick size can vary depending on the specific security being traded, reflecting market conditions and regulations differences.
  • Regulatory Setting: Typically, market regulators determine the tick size for different securities to ensure fair trading practices.

How Tick Trading Works

When evaluating stocks, you may observe prices quoted to the smallest denomination, such as Rs 1, Rs 0.5, or Rs 0.05. Tick sizes are determined by the Securities and Exchange Board of India (SEBI) using the overall market value of a firm. For example:

  • Re 1 Tick Size: Applied to companies with a market capitalization exceeding Rs 10,000 crore.
  • Rs 0.5 Tick Size: Used for companies with a market capitalization between Rs 4,000 crore and Rs 10,000 crore.
  • Rs 0.05 Tick Size: Designated for companies with a market capitalization below Rs 4,000 crore.

For example, consider Tata Consultancy Services (TCS), whose last traded price (LTP) might be Rs 4,400. Given that TCS has a market capitalization well above Rs 10,000 crore, the applicable tick size is Re 1. Therefore, you would observe buy orders at Rs 4,399, Rs 4,398, Rs 4,397, etc., and sell orders at Rs 4,401, Rs 4,402, Rs 4,403, etc.

Tick Chart Trading: Reading and Interpreting Tick Charts

Tick charts are a valuable tool for traders to analyse price movements and market trends. Here’s how to interpret tick charts effectively:

  • Observe the Price Range: Each candle on a tick chart displays the price range of trades, helping traders gauge the extent of price movement during a specific period.
  • Identify Pattern Trends: Look for breakout and reversal patterns within tick charts to predict potential market shifts and make informed trading decisions.
  • Analyse Candle Representation: Each candle represents a series of trades. Shorter candles indicate minimal price movement, while longer candles reflect greater volatility and price swings.
  • Adjust Tick Values: Adapt tick values based on market conditions. Smaller tick values are suitable for volatile markets with frequent price changes, while larger values are better for more stable periods.

Conclusion

Understanding price movements in securities trading is a prerequisite for getting the tick. Among the areas directly influenced by the ticks are regulatory guideline, market liquidity and strategy formulation. Gaining proficiency in tick-trading can enhance an individual’s approach to markets irrespective of his or her experience in trading. Understanding tick sizes and how they affect prices movement will enable traders to make better investment decisions that result in better profits and more effective trading strategies.

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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