Tick Size: Tick Trading Meaning, Components & How Does it Works? (2024)

The tick size is basically the smallest step a price can move in the stock market.
In the US, the tick size is generally in dollars and cents.
In India, it is in rupees and paisa.
So, when a stock price changes, it is usually by one paisa in India.
Traders will pay close attention to these tick movements, as they can indicate changes in the market segments as well as trading patterns.

How is the tick size measured?

Back in the 2000s, the US stock market used fractions to express the tick size.
This means that instead of moving in whole numbers like we do now, the stocks moved in fractions of a dollar.
The most common fraction of the tick size is considered to be one sixteenth, which represents $0.0625.
Some stocks might use smaller fractions, such as one eighth or one thirty seconds.
In 2005, the Securities and Exchange Commission introduced a new law named Rule 612, which can be called the Sub Penny Rule.
This rule states that stock prices should be expressed in decimals rather than fractions.
Nowadays, in the US, all the exchanges follow this decimal system, which also makes it easier for investors to understand and trade stocks.
Sometimes, the Securities and Exchange Commission will allow for a larger tick size for less popular stocks.
In the future market, the tick size will vary depending on the instrument being traded.
In the S&P 500 futures market, which is a heavily traded market, the tick size is 0.25.
This will indicate the price will move in increments of 0.25 points.

What is tick trading?

Tick trading is commonly known as a tick-based trading strategy where traders will capitalize on the smallest price movements allowed by the tick size.
They will focus on the tiny fluctuations so as to make frequent and rapid trades.
This strategy is very common in markets that have strict tick size regulations.
The main example of strict regulations is the Indian stock market, overseen by the Securities and Exchange Board of India.
The main aim here is to profit from the incremental changes in price as dictated by the tick size.
It will often execute a large number of trades throughout the trading day to accumulate profits based on the small movements.

How does tick trading work?

Different investments have a different tick size, which is the minimum increment through which their price can change.
In 2015, the Securities and Exchange Commission approved a pilot program to widen the tick size of about 1200 small-cap stocks.
It included companies with a market capitalization of around $3 billion and trading volumes below one million shares daily on average.
The main purpose of this pilot program was to study how the increase in tick size has affected the trade in stocks as well as their overall liquidity.
The pilot program was started in October 2016, and it lasted for two years.
This program was a part of ongoing research into ways to improve trading conditions for the smaller companies in the stock market.

Components of tick trading

There are many components of tick trading.
They are as follows:

Tick size as a unit of measurement:

Tick traders will use the tick size as a basic unit of measurement.
They will watch how prices move in those tiny increments and will also try to make money from these small changes.

Precision and speed:

Here, traders work quickly and accurately.
They tend to make a lot of trades in a short time.
The main aim is to catch small, fast changes in the stock market that others will miss as they are focused on longer-term strategies.

Scalping opportunities:

Traders here often use a strategy called scalping.
They will try to make fast profits by taking advantage of the difference between the buying and selling prices and the tick size.
The traders might buy at one price and sell at another in a short time.

Algorithmic and high-frequency trading:

Tick trading will require computer programs and high-speed trading.
These programs will make a lot of trades very quickly by following the set rules.
They will also take advantage of the small differences in the price so as to make profits.

Dependency of tick trading on tick size

The main dependents are as follows:

Precision in decision-making:

Tick traders will tend to make quick decisions based on the precise value that is represented by each tick.
They will enter and exit positions accordingly.

Setting profit targets and stopping losses:

It is crucial but important as well to determine profits as well as stop loss levels.
Traders will set these levels as per their tick size so as to ensure their gains and losses.

Quantifying returns and risks:

Traders will tend to measure their returns as well as their risks based upon their tick size.
It will also help them to understand how profitable each trade can be by maintaining a risk-reward ratio.

Adaptability to market conditions:

This trading can adapt to different market conditions because it will rely solely on the tick size.
In a volatile market, traders will use the tick size so as to navigate the rapid changes in price.
In a calmer market, it will help to capture smaller fluctuations within a very structured framework.

Characteristics of the tick size

The main characteristics of the tick size are as follows:

Fixed incremental movements:

Tick size is considered to be the smallest price change that is allowed in the market.
It will provide a precise way to measure how the price will change.

Varied across instruments:

It will differ for different financial stuff as each market has its own tick size.

Regulated by authorities:

Governments and SEBI will be setting the tick size.

Affects market liquidity:

The size will affect how easy it is to buy as well as sell the stuff in the market.
A smaller tick size means more trading options.

Changes happen sometimes:

Authorities can change the tick size as per the changing market.

Psychological impact:

Tick size will affect how people will think about the market.

Conclusion:

Tick size provides the traders with a number of benefits and will also ensure that the prices remain close to their genuine worth.

Frequently Asked Questions (FAQs):

Q1) What is the tick size?
The smallest increase or decrease in the price movement is known as the tick size.

Q2) Does the tick size matter?
Yes, tick size matters, even in the rarest of circ*mstances.

Q3) How much is 1 tick in trading?
$0.01 is one tick in trading.

Q4) How many pips is 1 tick?
1 pip is equivalent to 10 ticks.

Q5) What is the minimum tick size in India?
The minimum tick size in India is Re. 0.25.

About Us:

Nifty Trading Academy is our academy where we teach you about the stock market as well as technical analysis of the market. Here, we also provide live market trading, and we also upload blogs for the same. Feel free to read the same.