24 Feb, 2025
6 mins read
When you’re trading in the stock market, every second counts, and even the smallest price fluctuations can present profitable opportunities. Tick trading thrives in this environment, allowing traders to capitalise on minute price changes that occur within incredibly short time frames. This trading style demands precision, quick decision-making, and a deep understanding of market movements. But what exactly is tick trading, how does it work, and why is it gaining popularity among seasoned traders? Let’s dive in to explore the intricacies of tick trading, from its fundamental components to winning strategies.
Some people bet on the outcome of cricket matches. Some bet on the outcome of each ball. Tick trading is like the latter, where you’re waiting for the tiniest price movement to make a quick trade. Tick trading is a high-frequency trading strategy where traders focus on the smallest price movements, called "ticks," in a financial instrument. Unlike long-term investors who hold stocks for months or years, tick traders operate on a much smaller time frame, sometimes holding positions for just a few seconds.
Think of it like this: if you're flipping a coin and someone bets on heads or tails for each flip, they're reacting to each outcome. Tick traders do something similar but with stock prices, reacting to every little up and down movement to make a profit.
Tick size meaning: It refers to the minimum price movement of a financial instrument. In simple terms, it's the smallest increment by which a stock's price can change. Just like how a ruler has the smallest measurement in millimetres, tick size helps measure the smallest movement in stock prices.
SEBI (Securities and Exchange Board of India) has set the following tick sizes for companies based on their market capitalisation:
|
Tick Size (in ₹) |
Market capitalisation (in ₹) |
|---|---|
|
1 |
>10,000 crores |
|
0.5 |
Between 4000 and 10,000 crores |
|
0.05 |
<4000 crores |
Tick size is like the speed limit in a market - it controls how fast and efficiently prices can move. Here’s why it matters:
Better liquidity: A smaller tick size can lead to more frequent trades and higher liquidity, making it easier to enter and exit trades.
Tighter spreads: A lower tick size reduces the difference between the buying and selling price, making transactions cheaper for traders.
Market stability: A well-regulated tick size prevents excessive market noise and ensures fair price movements.
Small tick prices are great for volatile markets where price changes are quick, allowing greater potential for profit generation. Larger tick sizes work well in stable market conditions.
Tick trading is all about speed and precision. Here’s how it works:
Monitoring the market - Traders utilise tick charts, which record every price movement, to identify potential trading opportunities.
Identifying trading signals - Using technical indicators like moving averages, RSI, and Bollinger Bands, traders can determine exactly when to buy or sell.
Fast execution - Using high-speed trading software, traders place buy/sell orders in milliseconds.
Risk management – Since tick trading involves frequent trading, traders place stop-loss orders to avoid significant losses.
Let’s say Rahul, a tick trader, notices that a stock has been fluctuating between ₹200.00 and ₹200.05 every few seconds. He decides to buy at ₹200.00 and immediately sells at ₹200.05, making a small profit. He repeats this multiple times throughout the day. While each trade gives him only ₹0.05 per share, over hundreds of trades and hundreds of shares these small profits add up to a significant amount.
The components of effective tick trading include:
Tick size: Meaning the minimal possible price fluctuation.
Bid-Ask spread: The difference between a buyer’s highest offer price and seller’s lowest acceptable selling price.
Liquidity: The ease in buying and selling without affecting prices.
Market depth: The availability of buy/sell orders at different prices.
Trading software: High-speed platforms that execute trades in real-time.
Speed of execution: The speed at which a trade order is placed and completed.
Different traders use different strategies based on their risk appetite and market conditions. Here are some popular ones:
Scalping – Traders make numerous small trades throughout the day to accumulate profits from minor price movements.
Momentum Trading – Buying stocks that show strong upward or downward momentum and riding the wave.
Mean Reversion – Buying when prices dip below their average and selling when they rise above it.
Arbitrage – Profiting from price differences of the same stock on different exchanges.
Algorithmic Trading – Using automated bots to execute trades in milliseconds.
Example:
Meera, a tick trader, uses a scalping strategy. She notices a stock bouncing between ₹150.00 and ₹150.10. She buys at ₹150.00 and sells at ₹150.10 repeatedly throughout the day. By the end of the session, she has executed 100 trades, making ₹0.10 per share each time. If she traded 1,000 shares per trade, she made ₹10,000 that day.
Quick profits: Multiple trades in a short time can lead to significant earnings.
Reduced market risk: Short holding periods mean less exposure to major price fluctuations.
Profit in any market condition: Works well in both up and down markets.
Opportunities throughout the day: As long as there’s market movement, there’s a chance to make money.
Tick trading is not without its hurdles. One of the biggest challenges is high transaction costs since tick traders execute multiple trades daily, brokerage fees and taxes can eat into profits. Another significant issue is the need for advanced technology. To stay competitive, traders require high-speed internet, low-latency trading software, and direct market access, all of which can be expensive.
Emotional stress is another factor. The fast-paced nature of tick trading means traders must make split-second decisions, which can be mentally exhausting. Additionally, slippage risk is a major concern. Market prices can change in an instant, and even small delays can lead to orders being executed at unfavourable prices. Finally, regulatory constraints can impact tick traders, as financial authorities often impose restrictions to prevent excessive high-frequency trading, adding another layer of complexity to the process.
Tick trading is like surfing - catching the right wave (price movement) at the right time can be exhilarating and profitable. But just like surfing, it takes practice, precision, and the right tools to master. Whether you’re a beginner looking to explore short-term trading or an experienced trader refining your strategy, tick trading offers a dynamic way to navigate the stock market.
Yes, but it requires skill, discipline, and quick execution. While small profits per trade add up, transaction costs and market risks need to be carefully managed.
Smaller tick trading offers more opportunities and lower transaction costs due to tighter spreads. However, it also increases competition from automated traders and market noise, leading to false signals.
Tick size controls price movement increments, affecting liquidity, trading costs, and market efficiency.
For most equities on NSE, the minimum tick size is ₹0.05, while for derivatives, it is ₹0.01.
Tick traders use real-time platforms like FYERS, algorithmic bots for automation, technical indicators like moving averages, and Level 2 market data for better order book analysis.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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