Forex trading is a lucrative business that attracts thousands of investors every year. However, before investing, it is essential to understand the basic terminologies used in the forex market. One such term is a tick. In forex trading, a tick is the smallest possible price change in a currency pair’s exchange rate. In this article, we will explain the concept of a tick and how it affects forex trading.
What is a Tick?
A tick is the smallest possible price movement in a currency pair’s exchange rate. In forex trading, currency pairs are always quoted in two prices – the bid price, which is the price at which a trader can sell the currency pair, and the ask price, which is the price at which a trader can buy the currency pair. The difference between these two prices is known as the spread.
The tick size depends on the currency pair being traded and the exchange on which it is traded. For example, in the EUR/USD currency pair, the tick size is 0.0001. This means that the exchange rate can increase or decrease by 0.0001 points. In other words, if the EUR/USD exchange rate moves from 1.2000 to 1.2001, that is one tick.
How Long is a Tick in Forex Trading?
A tick’s duration in forex trading depends on the timeframe being used. For example, if a trader is using a one-minute chart, a tick will last for one minute. On the other hand, if a trader is using a five-minute chart, a tick will last for five minutes.
It is important to note that the duration of a tick is not fixed and can vary depending on the currency pair and the trading platform being used. For instance, if a trader is using a trading platform that updates the exchange rates every second, a tick will last for a second.
Why is Tick Size Important in Forex Trading?
Tick size plays a critical role in forex trading as it determines the profit or loss a trader can make in a trade. For example, if a trader buys the EUR/USD currency pair at 1.2000 and sells it at 1.2001, they have made a profit of one tick. If the trader had bought one lot of the EUR/USD currency pair, which is equal to 100,000 units, the profit would be $10 ($1 x 100,000 units).
Similarly, if the trader had sold the EUR/USD currency pair at 1.2000 and bought it back at 1.1999, they would have made a profit of one tick. If the trader had sold one lot of the EUR/USD currency pair, the profit would be $10.
However, it is important to note that forex trading involves leverage, which means that traders can trade larger positions with a small amount of capital. While leverage can increase profits, it can also magnify losses. Therefore, traders should always use proper risk management techniques like stop-loss orders to limit their losses.
Conclusion
A tick is the smallest possible price change in a currency pair’s exchange rate. The tick size depends on the currency pair being traded and the exchange on which it is traded. The duration of a tick in forex trading depends on the timeframe being used. Tick size is important as it determines the profit or loss a trader can make in a trade. Therefore, traders should always use proper risk management techniques when trading in the forex market.
