In the fast-paced world of financial trading, a “tick” is the smallest change in the price of an asset. For beginners, it can be difficult to understand the significance of the number of ticks. But imagine you’re buying a commodity and the seller is only allowed to change the price in increments of 1,000 Tomans. This restriction can cause you to pay more than you want or receive less than you want. In financial markets, a low number of ticks can create similar challenges. This can affect pricing accuracy, transaction costs, and even complex trading strategies. Understanding these challenges is essential for every trader, from beginner to professional, to make more informed decisions in the market.
why having fewer ticks can be problematic for trading strategies?
Reduced Pricing Fidelity:
Example: Suppose the actual price of EURUSD is 1005 , but due to tick restrictions, the price can only be 1000 or 1010 . This makes pricing inaccurate and traders cannot.
The price may fluctuate between 1000 and 1010 . This can lead to artificial fluctuations in the market.
If demand is higher, the price is likely to reach 1010.
If supply is higher, the price is likely to remain at 1000.This situation can lead to an imbalance in supply and demand, as the price cannot reach the true equilibrium point (1005 ).
Buyers may be forced to pay 5 more (at 1010).
Sellers may be forced to sell 5 less (at 1000).
Some traders may wait for the price to reach their desired point, which can reduce trading volume.
Increased importance of hidden orders: Professional traders may use hidden orders to trade at prices between 1000 and 1010.
Ultimately, this restriction on ticks can lead to inefficiencies in the market, increasing trading costs for some traders, and creating profit opportunities for professional traders who can exploit these inefficiencies.
IN OTHER WORD:
Delay in reaching the true price:
When the true price is 1005 but only 1000 and 1010 are tradable, the market takes longer to reach the true price.
This delay can eliminate or alter trading opportunities.
Increased trading volume at certain points:
Traders may trade more volume at 1000 or 1010 because they believe the market is moving against the trend.
This increased volume can increase the risk of the trade.
This movement pattern may repeat itself in the market, causing artificial volatility.
CONTINUE
why having fewer ticks can be problematic for trading strategies?
Reduced Pricing Fidelity:
Example: Suppose the actual price of EURUSD is 1005 , but due to tick restrictions, the price can only be 1000 or 1010 . This makes pricing inaccurate and traders cannot.
The price may fluctuate between 1000 and 1010 . This can lead to artificial fluctuations in the market.
If demand is higher, the price is likely to reach 1010.
If supply is higher, the price is likely to remain at 1000.This situation can lead to an imbalance in supply and demand, as the price cannot reach the true equilibrium point (1005 ).
Buyers may be forced to pay 5 more (at 1010).
Sellers may be forced to sell 5 less (at 1000).
Some traders may wait for the price to reach their desired point, which can reduce trading volume.
Increased importance of hidden orders: Professional traders may use hidden orders to trade at prices between 1000 and 1010.
Ultimately, this restriction on ticks can lead to inefficiencies in the market, increasing trading costs for some traders, and creating profit opportunities for professional traders who can exploit these inefficiencies.
IN OTHER WORD:
Delay in reaching the true price:
When the true price is 1005 but only 1000 and 1010 are tradable, the market takes longer to reach the true price.
This delay can eliminate or alter trading opportunities.
Increased trading volume at certain points:
Traders may trade more volume at 1000 or 1010 because they believe the market is moving against the trend.
This increased volume can increase the risk of the trade.
This movement pattern may repeat itself in the market, causing artificial volatility.
CONTINUE
