Think in Ticks, Not Dollars

When thinking and talking about their performance, a habit many traders tend to get into especially when they are just starting out, is using a $ value for p/l. It’s easy to see why as well – a new trader is likely to keep their eye fixed on the finite amount of trading capital with which they attempt to “make it”. The trouble is, that if you approach the markets in this manner, it leaves you open to all kinds of psychological obstacles to overcome. Instead, think in ticks not $.

What’s a tick?

Just in case you don’t already know, a tick (or pip for forex traders) is simply the minimum price increment of a market. The value it represents to a trader depends on the specifications of the product they’re trading and the number of contracts they trade with. So for example, you might trade the 30 Bund contracts per trade. The Bund’s tick value per contract is €10. This means you will make or lose €300 (30 lots x €10 per price) for every price your exit price differs from your entry price.

Psychological havoc

Okay so with the explanation of ticks out of the way, let’s come to the real point – most people have strong emotions when thinking about making or losing actual money. Hell, I get a little annoyed if I think I’ve been swindled at my local supermarket!

But so many problematic and disruptive emotions can be triggered. Of course there are the obvious fears of losing money and missing out on an opportunity, but there are other fears too. For whatever reason, losing money can make us feel very stupid and feel that we may appear very stupid to others. One of the rather less desirable consequences of this can be the urge to prove that we’re not – and this can lead to immensely destructive bouts of fighting the markets.

In capitalistic societies, it tends to be assumed to some degree that the level of money you’ve made mirrors your success and your value as a person. People may argue this point by talking about sense of fulfillment and purpose being more important, but the simple fact of the matter is, I can’t recall a trader who thinks this way. Sure, there’s the challenge of trading. But succeeding in this challenge means making money.

If you’re not careful, you might well find that these emotions can play psychological havoc with your thoughts as you trade and force you to deviate from your well-planned strategy.

Remove the attachment to money

As simple as it might seem, part of the solution to some of the emotional issues you face can be to remove your attachment to money and think in ticks not $. Let me clarify this a little. I’m not saying that you should never look at your account statement – you need to know how much capital you have in your account and how much the margin requirements are. But generally, it’s better to use ticks for all other purposes.

This means two things. First off, you need change your onscreen p/l to display in ticks or if you can’t do that then choose to not display it at all. In all likelihood, the most heightened emotional state you’ll experience is going to be in the heat of battle – when you’re actually trading. So removing the cue for these emotions to be activated can go a long way towards removing the issue. The next thing you need to do is to switch all your performance analysis to be tick based. Even better, switch it to be based on ticks per contract traded. So this means that if you make $1,000 on the ES by trading a 20 lot, your relative performance is much worse than making $1,000 trading a 2 lot (20 lot = 1 point/4 ticks per contract vs. 2 lot = 10 points/40 ticks per contract).

Think in Ticks not $

Of course, you’ll probably be thinking “but it’s a really simple calculation to turn ticks into a $ value anyway” and I’d agree. However, the goal is to start to think in terms of how much of a market move you make or lose and take away the $ value. Thinking in terms of ticks and not the monetary value attached to a tick is something I’ve done for as long as I can remember – when will you start?

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.