Trading With Tick Charts

Exactrades May 13, 2012 0
Trading With Tick Charts

For the purpose of decision-making, a long-term investor may choose to use charts, however many are likely to base their decision on fundamental analysis. A short-to-mid-term investor might incorporate weekly/daily/hourly charts along with the fundamental analysis to help him or her take advantage of trading opportunities. Similarly, a day trader would want to seize as many trading opportunities over the course of day. The use of longer period charts may defeat the purpose. As a result, such traders look for the smallest details and analyze reasonably short period charts to trade effectively. This brings us to our topic of discussion: that tick charts, which can form a bankable tool for day trading.


Let’s begin with defining tick charts. These are special charts that draw a new bar after certain number of trades, for example after every 500 trades. Unlike conventional charts that draw a new bar after a set period of time (also know as time-based charts), tick charts are entirely based on trading activity. One should not confuse them with the NYSE Tick Index, which is altogether a different entity that measures the number of stock issues trading on an up tick versus a down tick. Tick charts are largely implemented by intraday traders for they assist in making quick trading decisions without having to wait for time-based charts (e.g. 5-minute chart) to close before making a call.


As tick charts are dependent on the trading activity of a particular security, these charts essentially provide the visual representation of a time and sales window (aka. tape). The time and sales window basically shows the trader detailed information regarding the order flow for a particular security. By using tick charts, a trader can assess all that information within the price chart and possibly removing the need of watching the tape separately. This allows the trader to distinguish professional’s moves from amateur’s moves in the security’s price. For instance, a trader can compare the relative size of the volume histogram, which indicates the average trade size during the tick formations. Bear in mind, when volume is plotted on the tick chart one sees the total number of contracts or shares traded during that tick, for example, last 100 trades. So if the volume histogram is low it’s possibly a sign of amateurs trading and if the volume histogram is high could be seeing professionals trading.

These charts can also be used as a variation of the practically discontinued ‘odd lot theory’. As per the theory, the small investors time their investment decisions poorly, as they are relatively inexperienced. Therefore, it believes that one could outperform the stock market by identifying the odd-lotters and making investments opposite to them. Similarly, by identifying what the amateurs are doing from the volume histogram, you can fade (or do the opposite) of them. That is to say, if they are shorting at dips then you can buy, and vice versa.

Tick charts are also known for their ability to condense low activity periods. This allows more “continuous” analysis between days, with trades setting-up pre-open on a tick chart, or fewer false breakout trades during market inactivity. They can also assist you to get a jump on a breakout. For instance, if you are waiting for the close of a time bar to enter a trade, that would confirm a breakout, a tick chart will get you in earlier. It is a proven fact that using a tick chart, one could see a surge in activity and enter at the (tick charts) bar’s close, which usually outpaces other time-based charts. An early entry means more profits thereby tick charts can greatly enhance your returns. But keep in mind, it could also lead to more head fakes.


The tick chart is a noteworthy charting tool that can provide a wealth of information about the details of the trading activity. They are essentially a visual depiction of the time and sales window, which is highly regarded as an all-important tool for day traders. Further, its ability to identify true moves, false breakouts, compress low activity periods and outpace the time-based charts for confirmation, makes it an extremely valuable day-trading tool.


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