Tick Index: Definition, Example, and Trading Strategies

What is the Tick Index?

The tick index compares the number of stocks that are rising to the number of stocks that are falling on the New York Stock Exchange (NYSE). The index measures stocks making an uptick and subtracts stocks making a downtick. For example, there are roughly 2,800 stocks listed on the NYSE. If 1,800 stocks have made an uptick and 1,000 stocks have made a downtick, the tick index would equal +800 (1,800 – 1,000).

Understanding the Tick Index

The tick index is a popular indicator used by day traders to view the overall market sentiment at a given point in time. Seeing the ratio of "up" stocks to "down" stocks allows traders to make quick trading decisions that are dependent upon market movement. Typically, readings of +1,000 and -1,000 are considered extremes; traders should be mindful of overbought and oversold conditions at these levels.

A tick index is a short-term indicator, often only relevant for a few minutes. For traders looking to enter into bullish sentiment, a positive tick index is a good indicator of overall market optimism, as more stocks are trading on an uptick compared to those trading on a downtick. However, traders should remember that the tick index is a very speculative identifier of market sentiment at a specific point in time and is considered unreliable for traders who use longer-term strategies.

Example of the Tick Index

Trading with the Tick Index

Rangebound Market: The tick index can be used to help time entries and exits in choppy markets. Traders could open a long position when the tick index falls below -1,000 and exit when the indicator gives a reading of +1,000. Traders could match these readings with key support and resistance levels from an existing trading range before entering the market.

Trending Market: The tick index can remain above or below zero for extended durations when a stock is trending. If a market is trending higher, traders could take entry when the indicator returns to zero instead of waiting for it to return to – 1,000. Other indicators could be used in conjunction with the tick index to increase the probability of a successful trade. For instance, traders might use a moving average with the tick index to confirm the market is trending.

Divergence: Traders can look for divergence between the tick index and price to gauge the underlying strength of a market. For example, if a stock's price is making lower lows, but the tick index is making higher lows, it indicates that the sellers may be losing momentum. Conversely, if a stock's price is reaching new highs while the tick index is failing to register new highs, it suggests possible weakness in the prevailing trend.