Good Tick, Bad Tick, No Tick

04/24/2009 12:01 am EST


Today's Tip for Traders is a very simple subject, however, it is one that generates much confusion and is the source of many e-mail questions. I am sure you all have seen a large tail develop in a chart either during the day or on your daily chart. Sometimes these tails disappear after a period of time. The common questions for traders then become: Did the stock really trade there? Will such a move stop me out? Could I get filled that far away from where the market was only seconds before? Is this an indication of future price movement?

First we need to define what we mean by “outside of the market." The market is defined by the inside bid and the inside offer. When a trade goes off outside of this area, we consider it to be outside of the current market. There are three times when a trade can go off outside of the market. First, any trader can make a trade go off outside the market by a small amount by simply using an ECN that only trades with itself. These are real trades, however, and they usually occur only slightly outside of the real market. They happen only because of the internal rules of a few remaining ECNs that only allow trades within their own system. They give no indication of future price movement.

The second occurrence happens when a mistake is made in the recording of a sale that shows up on the ticker, and therefore, in the chart. It is usually easy to spot because it is often far outside the market (often in exact one or two dollar amounts) and has very small volume associated with it, such as one typical trade size. This is literally a mistake and gives no indication of future price movement.

The third occurrence is known as a "block trade." This can be distinguished from the “mistake" above because it is usually not as far out of the market and will often happen on large volume. This occurs when market makers or specialists get together and complete a transaction outside of the level two screen. This is perfectly fair, and there is no issue regarding the validity of the trade. Many traders feel that block trades can be used as a predictor of future price movement, but this is not true. These are usually at the end of a large purchase or sale for a market maker or specialist, and like the others, give no indication of future price movements.

None of these occurrences are what we consider a valid reason to trigger an entry or an exit to a stock. However, if you choose to use automatic stops, some or all of these events may trigger your automatic stops. You need to check with your broker and find out what method is being used to trigger automatic stops and entries. Most trading software systems now have ways to place conditional orders so you can set more protections to avoid being shook out of a trade that may be a bad tick.

By Avery Meizner of


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