What is Tick in Securities Trading - How Does It Work
When you delve deep into the world of securities trading, you will come across several concepts and terminologies that might seem confusing at first. One such term is “Tick”. It is the smallest possible downward or upward movement in a security’s price. It is important to have a thorough understanding of the tick to make an informed decision.
In this article, we will explore the concept of a tick in trading, how it works, its components, and much more. Keep reading to learn more.
What is Tick in Trading
A tick is the smallest price movement in the price of a security. It is useful for measuring market sentiment and price fluctuations and providing traders with insights. It states the price increment between the "bid" & "ask" quotes.
It affects trading strategies by influencing the cost of executing trades, impacting the efficiency of price discovery, and shaping order book depth. Hence, traders need to consider the tick size when deciding on their entry and exit points.
Companies | Type | Bidding Dates | |
| Regular | Closes Today | ||
| Regular | Closes Today | ||
| SME | Closes Today | ||
| SME | Closes 24 Oct | ||
| SME | Closes 24 Oct |
Characteristics of Tick Size
Here are some of the characteristics of Tick size:
- Tick size is the smallest price movement in a financial security
- It is significant for high-priced securities
- The tick size impacts the profitability of a tick trade
- It varies depending on the security that is being traded
- It is generally set by market regulators.
How Does Tick Trading Work
While evaluating stocks, you will usually notice a quoted price down to the last penny. It can be Rs 1, Rs 0.5 or Rs 0.05, depending on the market capitalisation of the company.
The Securities and Exchange Board of India (SEBI) has set the following tick sizes for companies based on their total market capitalisation:
- Re 1 for companies with a market capitalisation exceeding Rs 10,000 crore
- Rs 0.5 for companies with a market capitalisation between Rs 4,000 crore and Rs 10,000 crore
- Rs 0.05 for companies with a market capitalisation below Rs 4,000 crore
For instance, the last traded price (LTP) of TCS is Rs 4,400. As TCS has a market cap of more than Rs 10,000 crore, the permissible tick size would be Re 1.
There can be several buy and sell orders for TCS where buyers are looking to pay less than Rs 4,400, and sellers are seeking a price higher than Rs 4,400. Now that the tick size for TCS is Re 1, you should observe many buy orders at bid prices of Rs 4,399, Rs 4,398, Rs 4,397, and so on.
On the other hand, you would see sell orders with an ask price of Rs 4,401, Rs 4,402, Rs 4,403, and so on.
Tick Chart Trading: How to Read a Tick Chart in Tick Trading
Here is how you can read a tick chart and interpret it in a simple way:
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Observe the Price Range
The height of a candle shows the price range of trades, making it easy for traders to understand how much the price is moving.
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Observe the Pattern Trends
While analysing trading tick charts, identify breakout and reversal patterns and take advantage of this in predicting market movements.
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Observe the Candle Representation
Each candle on a tick chart represents multiple trades. Shorter candles show less price movement, while longer candles indicate higher volatility.
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Adjust the Tick Value
You can adjust tick values to match market conditions. Smaller tick values are good for volatile markets with quick price changes, while larger ones are better for calmer periods.
Summing Up Tick Trading
Ticks represent the movements in the price of a security, impacting trading strategies, regulatory frameworks, and market liquidity.
Whether you are a professional trader or a newbie, understanding tick trading and how it works can help you enhance your trading strategies. Moreover, this understanding and accurate interpretation can help you make more informed investment decisions, resulting in higher profitability.