A “tick” refers to a change in the price of a financial instrument, whether that price movement is up or down.
Each market has a defined tick size, and changes in price can only occur in multiples of this tick size.
Tick Size in Different Markets
Forex Market:
In the forex market, where currencies are traded in pairs, a tick usually represents the smallest change in the exchange rate of a currency pair. This change is typically equivalent to a one-pip change.
For example, consider the EUR/USD pair trading at 1.1700. If the price changes to 1.1701 or 1.1699, this would be a one tick movement.
Stock Market:
In the stock market, a tick traditionally represented a 1/8 of a dollar movement as stocks were originally quoted in fractions, not decimals. However, the switch to decimalization in the early 2000s meant that stocks are now quoted in decimals, and one tick usually represents a one-cent change in the stock price.
For instance, if a stock is trading at $50.00 and it moves to $50.01 or $49.99, it would be considered a one-tick movement.
Futures Market:
In the futures market, a tick is the smallest price increment a futures contract can move. The tick size varies depending on the futures contract being traded.
For example, in the case of Gold futures, one tick is equal to $0.10. So, if Gold futures move from $1,800.00 to $1,800.10, that’s a one tick movement. This tick movement would represent a specific amount of money gained or lost on the contract.
Why Ticks Matter?
Understanding and tracking ticks is critical, especially in high-frequency trading and algorithmic trading.
The frequency of price changes, or tick data, can significantly impact trading strategies and profitability.Traders use tick charts, which plot price changes, for a more granular view of price movements. These charts can help identify patterns and potential trading opportunities.
For example, in a volatile market, tick charts show more detailed information than a regular time-based chart by representing rapid price changes more accurately.
Furthermore, ticks are crucial when placing certain types of orders. A stop order or a limit order, for example, could be triggered by a specific tick.
Summary
In summary, a tick, representing the minimum price movement of a financial instrument, is an essential concept in trading.
Its relevance becomes more apparent in specific trading strategies and scenarios, like high-frequency and algorithmic trading.