Last updated on March 20th, 2020
Something that frequently comes up in the EU Trade Room is the possibility of a market moving to test a price and failing to move beyond it by more than 1 tick. So I thought it’d be useful to describe what a 1 tick fail really is and why it’s such a useful phenomenon to watch out for.
The theory behind it
The theory behind a 1 tick fail is basically pretty simple. If a market put’s in a price extreme, often the high or low of the current or a previous session, then only manages to break it by a tick when it tests beyond this price, it demonstrates that there’s no additional interest in moving price in that direction.
This can contribute to a decent reversal taking place in two ways.
The first is that a trader looking to fade the current direction (i.e. looking to place a trade to profit from a reversal) is likely to be buoyed by the fact that price was unable to extend by more than a tick and therefore feel more confident in placing their trade.
The second way is that any trader who is already holding a position that’s onside in the direction of the attempted retest, will see that there’s no additional interest at that time and either look to exit their trade or at the very least, scale out of some of the position due to the rising risk of holding onto it.
What’s a 1 tick fail?
The term “1 tick fail” is probably not entirely accurate for all markets as thinner products like the Dax or Crude Oil can certainly demonstrate the same kind of behavior as I’ve already described, by pushing through an extreme by just a little bit more than one tick.
It’s still important to draw a line though and so you must recognize what’s reasonable number of ticks for the market that you’re looking at. Either way in the interests of being precise, it’s better to describe the phenomenon as a “failed auction”.
The other important factor in defining technically defining the phenomenon, is what the market is failing against and how it got there.
In terms of what, the more significant the area, the better. If it’s the current high of the day, that’s a start. If it’s a major high or low from another session and it’s being retested for the first time in a while, all the better. If the failed auction happens at a price level of some significance, it’ll hold more weight.
How it got to the test is important in the same way that you need to consider whether you’re trading with a higher timeframe participant or not – the kind of participant that moves the market.
If there’s a small swing between the extreme and not very much time, it’s way less important and gets swallowed up into single candlesticks.
Ideally, there should be a decent amount of time between tests – at least 15mins plus or better still, the extreme being tested is in a previous session entirely.
The size of pullback after the extreme was put in should really be something that’s going to be clear on a higher timeframe chart too.
The key price action
This is the bone of contention – what’s the key price action that makes a 1 tick fail or a failed auction valid? Just like any other type of market behavior, there are many historical examples of potential patterns that end up camouflaged by the subsequent movement.
So just because a market has currently broken the low by only 1 tick and pulled back a little, doesn’t mean to say that it’s a failed auction yet. So when do patterns work?
For me, it’s important to see a pullback from the extreme that’s just been breached by a tick (or a handful of ticks for a thinner product), followed by a retest that doesn’t reach the last test extreme and finally a break of the pullback price by more than a tick.
Example in the ES: –
Example in the FTSE: –
Why spotting a 1 tick fail early is useful
Whether you’re looking to take a reversal trade or you’re already in a trade that’s going into the direction of the extreme test, then clearly the possibility that there will be a 1 tick fail/failed auction is going to be of interest to you.
If this happens, the sooner you enter or exit your trade, the more profits you are likely to bank. But the challenge for most is guarding against injudiciously labelling a 1 tick extension a 1 tick fail/failed auction.
But recognizing the picture as it unfolds will ensure that you’re primed to take action (or not) if the failure is confirmed. Once you’ve spotted the possible failure, have the patience to wait for the price action to confirm it.
This is one type of market behavior that has been historically reliable, so understanding it could be useful for the future.