Traders are constantly analyzing whether a market is trending or not. Knowing the state of a market is vital for traders. Nothing damages an account like trading on the wrong side of a trend, such as buying before a sell-off has been exhausted or selling a rally early. Just as bad is getting chopped up in market whipsaws while believing a new trend is imminent. Whether a long-term, swing or short-term trader, every practitioner in the markets faces the same dilemma.
For the day-trader who is speculating in E-mini S&P 500 futures, it is essential to make the correct call as to day type: trending, rotational or reversal. The leverage used when trading futures combined with the market’s inherent intra-day volatility requires the trader be on the right side of the market. Otherwise, the day ends with a series of losing trades.
Fortunately, when trading is based on stock indexes, there is an abundance of internal data produced by the exchanges that can be used in trade strategies. This is a reason many traders gravitate to stock index futures. One of the purest data items available from the stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq, is exchange-wide tick data, referred to as ticks.
TRADE BY NUMBERS
Ticks are not the up- and down-tick values of individual stocks, but a periodic count of the number of stocks that have traded up (the ask price lifted) minus the number of stocks that have traded down (the bid price hit). For the NYSE, tick values typically range between 1,000 and -1,000.
Some day-trading systems make use of the ticks to fade the market on a short-term, scalping basis. For example, if the ticks value is suddenly above 1,000 or below -1,000, then scalpers will fade the market (1,000, they sell; -1,000, they buy), assuming a short-term over-bought or over-sold condition is occurring.
Tick data are delivered continuously and periodically, up to a frequency of one reading per second. When used as the basis for an indicator, it is necessary to determine how to process ticks. Interestingly, testing shows that these statistics all give the same relative measure of stock market activity:
• one-minute period sums of all received ticks.
• one-minute period means of all received ticks.
• one-minute period means of high, low and close ticks.
Because of this, easy-to-work-with one- minute open-high-low-close (OHLC) bar charts of ticks are sufficient for an analysis. While the tick fade strategy is a viable scalping technique, the data can be put to use to classify day type. Knowing how to determine day type is invaluable with a variety of intraday trade strategies