What is the Tick Index?
The Tick index measures the very short term health of the markets by taking the difference between the number of stocks on an uptick and the number of stocks on a downtick. The Tick index sums up this difference for all stocks in the New York Stock Exchange. For example, if there are 3000 stocks on the NYSE and 2000 of them printed an uptick while 700 printed a downtick, the Tick would read as +1300.
How to Use the Tick Index in Day Trading
If you take a look at this chart, it will look like a bunch of noise. That is mostly correct; we want to use this chart to recognize extreme buying and selling activity. That extreme buying and selling displayed by the Tick warrants caution or even a reversal in the opposite direction. We want to pay attention to tick readings of +/-600, +/-800, and +/-1000. We keep an eye on the 600 level as it will signal a possible move to 800 or even 1000.
When we are in a losing long position and the tick reaches 800, think about selling out. The market may be climaxing to the upside and the fact that you are in a losing position indicates that the position is not a good one.
I use readings of 1000 and -1000 to scale out of all long and short positions and even think about going the opposite way of the market.
Notice how 1000 and -1000 produced decent intra-day reversals in the S&P 500. The higher the tick readings, the more powerful the reversal signals may be.
Kunal Vakil is the co-founder of www.mysmp.com (My Stock Market Power) which provides free trading articles and videos to investors covering a broad range of trading topics. Prior to becoming a full time day trader, Kunal designed bond trading systems for one of the largest secondary mortgage market participants and provided management consulting services to many top financial services companies.