Tick Size and Tick Value: Converting Moves to Money

[Fairman]

Tick Size and Tick Value: Converting Moves to Money

Scenario: a specification for gold lists contract size 100 ounces, tick size 0.01, and tick value 1 dollar per lot. A trader holds 0.30 lots and wants to know what a 5-dollar move means, and how many ticks that is.

Convert the move to ticks. A move of 5 dollars divided by a tick size of 0.01 is 500 ticks.

Convert to money. Each tick is worth 1 dollar per lot, so 500 ticks are worth 500 dollars per lot. At 0.30 lots: 150 dollars.

Cross-check using the contract size. A 5-dollar move on 30 ounces, which is 0.30 lots times 100, is 150 dollars. The two methods agree.

Now an index specification: tick size 0.1, tick value 1 dollar per lot, so a full point is 10 ticks worth 10 dollars. A move of 35 points is 350 ticks, or 350 dollars per lot. At 0.15 lots: 52.50 dollars.

A forex check: EUR/USD has a tick size of 0.00001, a tenth of a pip, with a tick value of 1 dollar per standard lot. One pip is 10 ticks, which is 10 dollars per standard lot, matching the familiar figure. Always read the unit in the specification, as brokers differ.

The general formula: money equals ticks times tick value times lots.

Use it to double-check any risk figure shown by your platform.

Exercise: compute the tick count and the money for a stop on each instrument you trade.

[Shadow Trader]

Instead of closing a bar every minute, a tick chart closes it after, say, 200 ticks. Busy periods produce many bars, quiet periods produce few. The chart adapts to activity, and that's the attraction for scalpers.

News releases get stretched across many bars, so detail is preserved. Dead hours get compressed into almost nothing, so they stop cluttering the chart.

The weak point is what a tick means on spot forex. Without real trade data, each tick is a quote update from the broker's feed, so the bar count depends on how that broker aggregates and filters prices. A 200-tick bar at one broker is not the same as at another, and a platform update can change it.

That makes tick charts hard to compare across brokers and risky for backtests that mix data sources.

A few traders use them anyway, with the broker's own feed for both testing and trading, and treat the tick count as a feed-specific unit.

Used carefully, they give a more even sampling of market activity than time bars. Used without understanding the feed, they can be misleading.

Has a tick chart given a clearer view than a one-minute chart on the same pair?

[Fairman]

Silver is a good extra example because its specification often surprises people. At many brokers, one lot of silver is 5,000 ounces, with a tick size of 0.001 and a tick value of 5 dollars per lot. A 20 cent move is 0.20 divided by 0.001, which is 200 ticks, and 200 times 5 is 1,000 dollars per lot. Cross check with the contract size: 0.20 times 5,000 ounces is also 1,000 dollars. That's a lot of exposure for a move that looks small on the chart. Specifications vary between brokers, so checking your own is essential before trading it.

[Amanhasnoname]

The unit check you mention at the end is the one that bit me. I was trading an index CFD at a broker where the tick size was 0.1 but the tick value was quoted per 0.01 lots rather than per full lot, and I calculated a stop on the basis of the wrong number. The platform showed my risk was about 12 dollars when it was really closer to 120. I found out because the loss on the screen looked ten times too large.

Now I do the cross-check you describe every time I add a new instrument. I take the contract specification, calculate the loss of a one-point move by hand with both methods, and then open a minimum-size trade and compare with what the platform shows as floating profit after a tick or two. If the three numbers don't agree, I don't trade it until I find out why.

I keep a short table in my notes with the tick size, tick value and contract size for each instrument I use, so I can check it in a few seconds before sizing.