How to Calculate Tick Size: A Complete Guide for Traders

Understanding how to calculate tick size is crucial for anyone involved in trading, whether in equities, futures, forex, or cryptocurrencies. Tick size defines the minimum price movement allowed for a security or contract. It directly impacts liquidity, trading costs, volatility, and strategy execution.

This comprehensive guide explains what tick size is, how to calculate it across asset classes, and how traders can integrate it into their strategies. We’ll also compare two different methods of handling tick size, highlight real-world implications, and provide a detailed fundamental framework for calculating and applying tick size in trading.

What Is Tick Size?

Tick size is the smallest possible increment by which the price of an asset can change on an exchange. For example:

If the tick size for a stock is \(0.01, the stock can only move in multiples of \)0.01 (e.g., from \(10.50 to \)10.51).

In futures trading, tick sizes are often contract-specific (e.g., the E-mini S&P 500 futures contract has a tick size of 0.25 index points, worth $12.50).

Understanding tick size is fundamental because it affects bid-ask spreads, execution precision, and strategy design.

Visual representation of how tick size impacts bid-ask spread

Why Tick Size Matters in Trading

Before diving into calculations, it’s worth emphasizing why tick size matters in trading:

Liquidity: Larger tick sizes can improve displayed liquidity but may increase trading costs.

Volatility: Smaller tick sizes often lead to narrower spreads but may create excessive micro-movements.

Execution Strategies: Tick size determines the granularity of order placement.

Profitability: For scalpers and high-frequency traders, even a single tick can mean profit or loss.

How to Calculate Tick Size

The calculation of tick size depends on the asset class and exchange rules. Below are step-by-step approaches.

1. Tick Size for Equities
   

In most equity markets, tick size is defined by the exchange and often depends on the stock price range.

Example (NSE India):

For stocks priced below ₹10 → Tick size = ₹0.01

For stocks priced above ₹10 → Tick size = ₹0.05

Formula:

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Tick Size = Minimum