Why You Must Consider Volatility when Trading with the TICK

Mar 16, 2011: 5:42 PM CST

If you’re an intraday user of the NYSE TICK – a powerful market internal – you must accommodate current market volatility into your trading decisions.  If you don’t do so, you’re likely to get in trouble.

Why?

Let’s take another look at the NYSE TICK and how it changes over time depending on the volatility of the current market:

What we’re seeing is the SPY (or just as easily could be the S&P 500) overlaid with the NYSE TICK ($TICK) which I frequently show in blog posts and you probably use in your intraday trading decisions.

Other than being a pretty picture (of waving blue), take a moment to look at how the TICK CHANGES in terms of market volatility.

Stated differently, you’re far more likely to see higher TICK highs (intraday extremes) and lower TICK lows during VOLATILE market periods than you are during lower volatile periods.

While this makes sense intuitively, it’s my guess that you’re probably not taking this into account in your trading decisions.

Here’s an example:

Trader A loves to fade intraday TICK extremes that register plus or minus 1,000.

That means when the TICK registers -1,000, the trader will get long (the SPY, @ES, or a leveraged ETF) or when the TICK registers 1,000, the trader will get short.

Thus, he (or she) is using the TICK as a contra-indicator intraday to put on (or take off) positions.

That may be a logical strategy, but it does NOT take into account the fact that the TICK itself is volatile, and readings of 1,000 may mean MORE in non-volatile times and LESS in volatile times.

Alternatively, a trader might see NO examples of the TICK registering 1,000 on the session during very low volatile periods.

Take a look at my recent research post entitled:

“Research on Changes in the TICK over the Last 10 Years.”

Not only does the TICK change in volatile or non-volatile periods, it changes behavior from year to year (or at least over a period of a few years – like 2007 to present).

Look at the chart above – I drew a black horizontal line at the +1,000 and -1,000 TICK levels.  Where you see white space (particularly at the end of 2010) means the TICK did NOT register a 1,000 reading for one side or both sides of the market.

No TICK beyond 1,000 means no trades for the intraday “fader” trader.  Oops.

What’s worse than a day where your strategy triggers no trades?

How about a day where your strategy triggers a short with a TICK reading of -1,000 but then the TICK falls lower to -1,200 then -1,400 – while price falls sharply with it… leaving you with a sudden, large loser as you got long the original -1,000 TICK reading.

Bigger oops.

Look for example at the May – July period in 2010 where daily TICK extremes of +1,500 and -1,500 were COMMON.  You’re in danger of blowing out a trading account if you deploy your + or – 1,000 TICK fading strategy in THAT type of environment.

So if you draw a permanent line in the sand with regard to the TICK, you risk the following pitfalls:

On one hand, you risk taking no trades (in a non-volatile environment) and on the other hand, you risk significant/serious losses/drawdowns if you try to fade the TICK too soon in a volatile period.

The quick conclusion is that you MUST take current stock market volatility into account and look at the TICK extremes relative to the very recent past – again in context of what the broader market is doing (ranging tightly or exploding violently).

It’s best to adapt your TICK extremes to the current market environment instead of doing the same thing (triggering in/out at the same absolute level) at the same TICK level – lest you get into trouble when the TICK changes character as it frequently does.

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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16 Comments

16 Responses to “Why You Must Consider Volatility when Trading with the TICK”

  1. Dwv4 Says:

    It sure worked today with a (1400+) the let me out of a short near the max

  2. Corey Rosenbloom, CMT Says:

    That's true! Great work!

    Did you mean negative 1,400 TICK? That was the low of the afternoon “meltdown” and it was good that you adjusted your parameters. If you exited on a -1,000 TICK, you would have left a good bit of money on the table.

    Fading the TICK – or using TICK extremes as exits – is generally a good strategy but it's important to adapt your levels to volatility instead of using arbitrary numbers.

  3. @NereusProject Says:

    Great Post, I recently began using the TICKs to look for market reversals. Its been working bad ass. I use the TICKs + price pattern (a waterfall of red bars- about ten) + volume to spot breaks. Now I'm aware that I'll need to keep an eye out for evolving TICKs.

  4. joeyfishface Says:

    Nicely done Corey

  5. Corey Rosenbloom, CMT Says:

    Thank you Joey!

    I hope all's well! Great to hear from you.

  6. Corey Rosenbloom, CMT Says:

    Good point – it's best to view the TICK in context of day structure (trend or range) and of course use it as confirmation when looking to play a pattern trade or set-up. Volume works well as a factor to observe along with TICK decisions/readings. Good work!

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