Updating Intraday TICK Extremes for Intraday Traders

Jun 28, 2011: 11:18 AM CST

Intraday traders must take into account volatility cycles when using the TICK intraday for trading decisions.

An intraday TICK reading of plus or minus 1,000 – often a trading entry or exit signal for some traders – means different things at different times in terms of the volatility cycles of both the market (high or low volatility) and of TICK itself.

Let’s take a look at the rolling 20 day moving average of the TICK over the last few years to see what this means:

(Click for full-size image)

For background reading, see my prior TICK Extremes updates:

“Why You MUST Consider Volatility When Trading with the TICK”

“Research in Behavioral Changes in the TICK Over the Last 10 Years”

What I’m addressing is the logic that “A plus 1,000 intraday TICK reading is an automatic sell signal” (either taking profits or initiating a new short-sale position intraday on an “extreme” TICK reading).

Or, “A minus 1,000 intraday TICK reading is an automatic buy signal.’

While this seems logical and has some historical backing, an intraday trader should adapt this type of logic to the current volatility both of the stock market indexes and the TICK itself.

Case in point, for the entire month of January 2010, there were zero plus/minus 1,000 intraday TICK readings.

From January to March 2011, similarly, there were absolutely no plus/minus 1,000 intraday TICK readings.

During the aftermath of the “Flash Crash” in 2010 (May – October 2010), the average intraday TICK extreme on the upside was 1,200 and roughly -1,100 on the downside.

A similar “higher than 1,000 average” TICK reading formed at the start of the bull market in early 2009.

As of this post, the 20 day average upper daily TICK high is 1,064 and the average lower daily TICK low is -1,085.

If you’re not taking intraday TICK volatility into account when trading this type of exit or aggressive fade strategy, you’re either…

leaving money on the table (when you exit at a TICK reading of 1,000 yet the TICK continues higher than 1,000 during a price rally in volatile times)

… or worse, losing money by fading market strength (short-selling) as price rallies beyond 1,000 to 1,200 or higher (along with price).

The same is true if you’re exiting at a -1,000 TICK reading, or going long (fading weakness) just because the TICK flashes -1,000.

It just takes a moment for you to assess the current volatility both of the market and of the TICK.

In the chart above, I’m simply plotting the 20 day simple moving average of both intraday TICK highs and intraday TICK lows.

I would encourage you to do the same (you can use other metrics to measure volatility as well), and adjust any intraday trading strategy that relies on trading decisions based on the TICK accordingly.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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