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Minimum Tick

Minimum Tick - Definition

Minimum Tick in futures trading is the minimum price increment that the price of a futures contract can change by.

Minimum Tick - Introduction

Minimum Tick, also known as "Tick Size", is one of the most important basic concepts to understand in futures trading. Minimum Tick affects everything from your position sizing to stop loss planning and how volatile the value of your futures position is (Read the Steps in Trading Futures). This is due to the fact that minimum tick along with contract size determines how much your futures position value changes everytime the price of your futures contracts changes.

This tutorial shall explore what Minimum Tick is in futures trading, how you can find out what the minimum tick for your futures contract is and how it affects the way you trade futures.

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What is a "Tick" in Futures Trading?

So, what exactly does a "Tick" mean in futures trading? The term "tick" goes all the way back to the days before computers as we know today were invented. Back in those days, futures traders get real time price changes not through a computer monitor like we do now but using what were known as "ticker-tape machines". A ticker-tape machine is a machine which receives price information from the trading floor through telegraph and then prints the prices out on a continuous piece of "tape". A tape is simply a narrow continuous strip of paper much like the magnetic cassette tape. Each single price transaction printed out on a ticker-tape is known as a "tick" and the underlying asset producing ticks is known as a "Ticker" (which is the name still used for stock symbols or other asset symbols today).

As such, a tick is simply a price movement by the underlying asset. Even today, a single price movement upwards is known as an "Uptick" and a single price movement downwards is known as a "downtick".

Ticker-Tape Machine

What is a "Tick Size" Futures Trading?

All asset prices trading in an open public market moves in ticks. Yes, all asset prices traded in an open public market move in price "blocks" instead of in a seamless continuous way. Stock price seems to move seamlessly, continuously, because its "Tick Size" is $0.01. A tick size is that "price block". Stock prices, with a tick size of $0.01, move in blocks of $0.01 which makes up that seamless continuous price action. However, not all assets move in tick sizes of $0.01. If a futures contract has a tick size of $10, its price will change in $10 increments which will make its price action look more volatile and "blocky" than a futures contract with a tick size of $0.01. Since the least amount of price change needed to reflect a change in the price of an asset is a "tick", it is also known as a "Minimum Tick".

What is "Tick Value" Futures Trading?

Knowing what a tick is and what tick size is allows us to find out what its "Tick Value" is. Tick value is the actual dollar value of a tick taking contract size into consideration and is the actual dollar value a single futures contract changes by with one tick. The higher the tick value, the more money is made or lost with each tick movement and is of particular concern especially for futures day traders. Basically, the higher the tick value, the higher the price volatility and the lower the tick value, the lower the price volatility. Beginner futures traders would therefore be more prudent trading futures contracts with lower tick value. Tick value of a futures contract is calculated simply by multiplying the minimum tick with contract size, this is also why contract size is also known as "Contract Multiplier".

Calculating Tick Value

The S&P500 index futures contracts traded at CME has a Minimum tick of 0.10 index points outright and a Contract Size of $250 per point.

Tick value is therefore 0.10 x 250 = $25. This means that the price of the S&P500 index futures contracts changes by $25 per tick per contract.

How Minimum Tick Affects Stop Loss Planning

In futures trading, you always want to know in advanced during your futures trade planning phase how many ticks away your stop loss point is. This is especially important when trading futures contracts with huge tick sizes. Knowing the minimum tick of your futures contract is essential in your stop loss planning as it tells you how many times price can go against you before it hits your risk tolerance. In order to do that, you would need to know the minimum tick as well as the contract size of the futures contract you are trading. Generally, the lower your risk tolerance, the lesser downticks (or upticks if you are going short) you can take before your stop loss point is hit. Knowing exactly how many ticks it takes to hit your stop loss point also help you determine if your risk tolerance level or your position sizing is reasonable before executing the trade. If your stop loss point turns out to be only a few ticks away, you might need to re-plan your trade in order to reduce the chances of an unnecessary whipsaw stop loss.

Example of How Minimum Tick Affects Stop Loss Planning

The S&P500 index futures contracts traded at CME has a Minimum tick of 0.10 index points outright and a Contract Size of $250 per point. Lets assume that SPAN Margin requirement is 10.5% and the S&P500 is currently at 1000 points.

Assuming you are bullish on S&P500 and wish to commit $30,000 to a long position with a risk tolerance of 5% on the position.

With $30,000, you could take position in 1 contract for $26,250. 5% risk tolerance means you are willing to lose $1,312.

$1,312 is 1,312 / 250 = 5.2 points and with a minimum tick of 0.10 points, your stop loss point would be 52 ticks away.

Does the "Uptick Rule" Affect Futures Trading?

Some of you might have heard of or have been affected by the "Uptick Rule" in your stock trading. What the uptick rule does is simply restrict short selling of securities on a downtick, so you can only go short when the price is on an uptick. What this rule really does is to stop traders from shorting in a falling market which theoretically adds to the speed of collapse. So, does the "Uptick Rule" affect futures trading? Fortunately, No. The uptick rule do not generally apply to derivatives trading, especially futures trading. However, some kind of uptick rule has been in force on options trading in the US market since 2010. As such, it is still critical to check if the specific futures market you are trading in has any "uptick rule" in force. Generally, there are no uptick rules in force for futures trading so futures traders are free to go short at anytime they want to, even in a strong bear trend.

Changes in Tick Size or Minimum Tick

Tick size for futures contracts sometimes change due to new developments in the specific futures market. A change in tick size affects everything from your stop loss to position sizing and sometimes even your profit taking policies. As such, it is important to keep abreast of any tick size changes and make sure your futures broker alert you of such changes.

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