What is Tick Trading in Stocks? How does it work?

Precision and timing are key to maximizing profits in a fast-paced stock trading environment. Tick trading is one such trading strategy that takes advantage of small price variations. Tick Trading enables you to extract maximum leverage from market fluctuations regardless of whether you are just starting or are an experienced trader. So in this blog, we will deep dive into what exactly tick trading is, how it works, and its pros and cons.

What is Tick Trading?

Tick trading is a short-term trading strategy that involves taking advantage of small price movements of stocks, commodities, or any other financial instrument. The smallest movement of security is called a tick, and tick traders try to take advantage of this small movement over a short term.

Unlike fundamental investors who look at fundamentals on a long-term basis, tick traders use technical analysis, chart formations, and order flow to make buy and sell decisions that are executed instantaneously. Tick trading is fast-paced and you need to make decisions quickly to capitalise on fast market movements.

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How Does Tick Trading Work?

1. Understanding Ticks in the Stock Market

A tick is the smallest increment a stock can move in price in trading. Each stock/market has its tick sizes. Here are a few examples, specifically in the Indian stock market:

• The tick size for the majority of stocks is ₹0.05

• If a derivative, tick size varies per exchange

A tick can be up, down, or sideways, depending on whether the last price traded was up, down, or unchanged.

2. Tick Charts vs. Time-Based Charts

Tick charts, which plot price movements based on a predetermined number of trades, are used by tick traders in contrast to conventional time-based charts (1-minute, 5-minute, or hourly charts).

For instance:

• A 100-tick chart indicates that, regardless of time, a new candlestick appears after every 100 trades.

• Compared to charts with fewer tick intervals, a 500-tick chart offers a more comprehensive picture of market sentiment.

By removing market noise, tick charts give traders a better understanding of momentum and short-term trends.

3. Key Components of Tick Trading

a) High-Frequency Trading (HFT)

HFT algorithms are widely used by professional traders to automate tick trading. Within milliseconds, these algorithms scan the market, spot price inefficiencies, and place trades.

b) The Scalping Approach

Tick trading is sometimes linked to scalping, a trading strategy in which traders make several tiny deals in a matter of minutes to make a little profit on each one.

c) Study of Order Flow

Order flow, or the buy and sell orders that are coming into the market in real time, is something that tick traders examine. An upswing may be indicated by a spike in buy orders, whilst a decline may be indicated by a spike in sell orders.

4. Best Markets for Tick Trading

Common markets for tick trading include the equity market, where stocks with high volatility and liquidity are best suited for tick trading.

• Futures & Options: For index and stock derivatives, traders employ tick-based tactics.

• Forex Trading: Tick trading is appropriate for currency pairs with tight spreads, such as USD/INR and EUR/USD.

• Commodities: Futures prices for gold, silver, and crude oil frequently fluctuate quickly.

Advantages of Tick Trading

• Fast Profit Potential: Traders can profit from little price changes several times during the day.

• Decreased Market Risk: Tick traders steer clear of overnight dangers because they only maintain positions for brief periods.

• Liquidity Advantage: By concentrating on high-volume equities, tick traders guarantee quicker order execution.

• Reduced Exposure to Fundamental Risks: Economic data and company results have less of an impact on short-term price behavior.

Risks and Challenges in Tick Trading

• High Transaction Costs: Slippage and brokerage fees increase with the frequency of trades.

• Emotional Pressure: Since tick trading necessitates making snap decisions, it can cause tension and exhaustion.

• Market Noise: It might be challenging to forecast trends due to the random nature of short-term price swings.

• Advanced technology is required since professional tick traders depend on real-time data and fast trading systems.

Tick Trading Strategies for Success

1. The Trend-Following Approach

Traders enter long positions when the price is heading upward (higher highs and higher lows); they enter short bets when the price is trending downward.

2. Reversals in Trading

By identifying support and resistance levels, traders may position trades correctly and predict market reversals.

3. Breakout Trading

When a stock breaks out of a key barrier or support level, traders place trades to capitalize on the quick momentum.

4. Volume-Based Tick Trading

Tick traders monitor volume surges in order to spot significant price movements and position transactions accordingly.

Final Thoughts

For traders who do well in hectic market conditions, tick trading is an intriguing and potentially profitable approach. To succeed, nevertheless, one needs a disciplined strategy, technical analysis abilities, and in-depth market knowledge. Before risking real money, novices should begin with paper trading or demo accounts.

Tick trading can provide your stock market strategy with a dynamic edge, regardless of whether you're an active trader or an investor looking at short-term chances.

Do you want to improve your trading? To assist you in making wise decisions, Motilal Oswal offers robust trading platforms, up-to-date market data, and professional research.

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Related Blogs - What is Tick in Securities Trading? | Understanding Tick size and its role