Updating the TICK Levels for Intraday Trading Reference

Dec 1, 2011: 1:04 PM CST

For those of you who use the NYSE TICK in your intraday trading, it’s very important to understand that the reference  TICK extremes – highs and lows – changes as a factor of market volatility.

What that means is that you can’t just call a +1,000 or -1,000 TICK reading “extreme” – the value of “extreme” cycles up and down over time.

Let’s look at the current reference levels along with the levels that have changed in 2011 so you can get a more accurate reference of what counts as an intraday TICK extreme that you use to factor into your trading decisions.

Click for larger image.

The combination chart above doesn’t show the finer details, so we’ll look next at TICK highs and lows separately to get a better picture.

What we’re seeing is the Dow Jones Index (could just as easily be the S&P 500 or other leading US Equity Index) on the top and a special custom indicator below that shows the 20 day simple moving average (in histogram form) of the intraday TICK highs and TICK lows.

You can see that the average is compressed (under +1,000 for average TICK highs and over -1,000 for average TICK lows) during periods of low market volatility and expanded for periods of high volatility.

Let’s pull it apart to see the data clearer and gather what this all means:

What we’re seeing above is the 20 day average (in histogram form for clarity) of the NYSE TICK Highs.  Remember, this isn’t the plain TICK but roughly a monthly average of TICK highs.

At the start of 2011, volatility was lower and thus the average intraday TICK high was closer to 850 to 900.  That meant that 850 to 900 was the “extreme” intraday TICK high to expect at the time.

Volatility increased throughout the year, as did the intraday extreme level we could expect to find TICK highs.

In fact, the 20d Average of TICK Highs peaked at the end of September at 1,300.   The current average TICK high is 1,139.

Let’s drive home that point.

Some intraday traders use the TICK either as a trigger to enter a new position, or to exit an old (profitable) position with the following logic:

Intraday Price Swings tend to reverse on intraday TICK extremes.

I’ve heard it many times where traders will use the round number 1,000 as their trigger – they’ll put on a short-sale position when they see a TICK reading of +1,000… or otherwise exit a long (buy) position when they see a +1,000 TICK reading flash on their screen.

What the data show above is that using a round number such as +/- 1,000 is insufficient a reference simply because the reference level – what constitutes an “extreme” or “overbought” TICK reading – CHANGES as a factor of broader market volatility.

Traders who fail to understand this concept risk two negative outcomes:

  • If the average intraday TICK High is +1,300 and a trader immediately puts on a short-sale when the TICK hits +1,000, the trader has a high probability of being stopped out for a loss as TICK – and price – continue higher beyond the +1,000 reading.
  • A trader who uses a +1,000 TICK to EXIT a bullish/long position leaves money on the table in the trade as price continues higher and TICK goes on to peak for the day near +1,300.

A trader who incorporates TICK Volatility – or the fact that intraday TICK Extremes change over time – has a better chance to adapt the strategies to the new ‘normal’ (average) in TICK extremes and thus reduce losing trades and squeeze more profit out of winning trades (using this strategy).

The logic – and data – are similar for negative 1,000 TICK readings on the downside:

We see the same type of situation mirror average TICK Lows as we saw above in average TICK Highs.

The start of the year gave us average intraday TICK Low extremes GREATER THAN -1,000 while the latter part of the year gave us intraday TICK Low extremes LESS THAN -1,000.

The same dangerous logic applies in terms of using -1,000 as your flat baseline:

  • Traders who go long at a negative 1,000 TICK reading face significant losses when the average TICK extreme low is -1,200
  • Traders who exit short positions at a negative 1,000 TICK reading risk leaving money on the table as price falls lower (and TICK lows expand to -1,200 or -1,300 per the average).

All you have to do is keep a running average of the TICK Highs and Lows on a Daily Basis, preferably a 20-day (one-month) average, which can be done in Excel if you do not have software where you can automatically plot a moving average of TICK highs and lows.

For additional background and prior updates on this concept, see my prior posts:

Updating TICK Extremes for Intraday Traders (June 28, 2011)

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

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

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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Comments
  • John Roberts

    Corey, thanks for sharing this analysis. I have been following your posts for quite some time and really enjoy them. I have two charting related questions for you if you don't mind:
    1. I've noticed that you use both Tradestation and StockCharts, I try to do the same but I find it confusing at times, can you please share your method on using both tools? When do you use one versus the other (other than the obvious of using TS for intraday).

    2. Your charts use a white background when most traders would rather use a darker background as white can be very bright if you have multiple charts opened. Do you also use a white background when trading?

    Thanks in advance.

  • Thanks John!

    TradeStation allows for excellent customization of indicators and better visuals in certain aspects, while StockCharts allows for a cleaner, more compressed picture for blogging purposes (visual).  Plus, not everyone has TradeStation and anyone can view StockCharts. 

    It's more a visual aid and customization (using the tools of each).

    As for white backgrounds, that's personal preference as well - I don't like dark backgrounds and got my start with white background charts and I stuck with those.  I trade off white customized TradeStation charts.  I once would have dozens of charts up but that's not the case now - I can do most of what I need on a handful of open charts at one time while trading.

  • This is great work Corey.  Would love if you could share the TS formula for creating the MA of tick highs and lows.  Thanks.

  • No problem - it's not a custom code in TS but mainly visual changes.

    I'm showing a 20 day Simple Moving Average of the $TICK Highs for one grid and $TICK lows for the other (I'm hiding the TICK/making it invisible) and then scaling the results to highlight the differences (not starting at 0). That would be the first step - get an average separately of TICK highs and lows (done in the input field).

    The rest is just aesthetics - color in the indicator field and scaling. 

  • Brian Johnson

    Thanks Corey.  How are you able to separate out the highs and lows though?

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