7 Reasons Why Tick Charts Could Improve Your Day Trading

Tick charts are becoming more and more popular among traders, as they provide a different perspective on trading than traditional charts. Many traders are using tick charts in combination with the common time-based charts for a better chart analysis.

What Are Tick Charts

A tick chart is a predefined number of trades between buyers and sellers. The bars on the tick charts are plotted based on a particular number of transactions. In other words, tick charts indicate the number of transactions per bar.

For example, if we have a 200 tick chart, each bar measures 200 trades per bar.  After 200 trades are completed, a new bar plots on the tick chart. Now, 200 trades between buyers and sellers mean that it could be a single contract traded 200 times between two different traders or it could be thousands of contracts traded between different traders.

It’s very important to understand this concept. A single transaction could include 1 contract, or 50 contracts or 547 contracts, for example. The number of trades is what determines the creation of a new tick on the chart, not the number of contracts.

This is a very common confusion with tick charts. So, tick charts are not measuring the true number of contracts traded. It’s actually the number of transactions made between traders, of varying contract sizes.

Most Used Tick Charts

With tick charts, the time element is eliminated. If you are trading on traditional charts, you have limited options. You can opt for M1, M5, M30, H1, H4, D1, W1 and W1 charts. With tick charts, you can backtest and choose your own settings.

Some prefer charts with 50, 100 or 200, 500 or 1000 ticks. Others prefer to use Fibonacci numbers when setting their number of ticks, like 21, 34, 55, 89, 144, 233 etc.

A good approach would be to select the tick number on your charts by comparing it to a time-based chart. For example, if you prefer trading on the 5-minute charts, you can choose a tick chart looking similar to that chart, like 200 ticks for example.

If you prefer to scalp, charts with 34 or 50 ticks will probably suit you. For day trading, 1000 ticks and 2000 ticks are the most common used.

There is no best number of ticks to trade with. Different traders use different strategies on tick charts that suits them best. You just have to test different settings and select the one you feel most comfortable trading with.

Advantages of Tick Charts

Less Market Noise

As tick charts are transaction based and new bars are formed only when there have been enough trades, the market noise is reduced.

The market noise is what distracts traders from the real picture of the market. The higher the noise, the more difficult it becomes to make intelligent decisions. The noise is often represented by useless candles, with no real value to the chart. Also, the wicks of the candlestick often induce traders into error.

Thus, they lose sight of what’s important on the chart and focus on unimportant elements.

The advantage of a tick chart is that compresses low-activity trading periods. On the time-based charts, you may see 30-40 useless candles, while the tick chart may offer you only 10-15 relevant ones.

Look at the chart above. We have almost 6 hours of trading range on a 5-minute Dow Jones Index chart. Now let’s see the difference on a 200-ticks chart.

You immediately spot the difference. The activity on the tick charts is more condensed. This may potentially enable you to get a clearer picture of overall price action and avoid being whipsawed by the market noise.

Better Analysis of Volatility

As the tick charts operate on trades, traders will see a new bar forming only when there have been enough trades completed between buyers and sellers. In this way, tick charts are practically adjusting to the market.

So, in times of high activity, tick charts plot more bars. This could signal an increased volatility.

Usually, when the market opens, the volatility increases and tick bars occur quickly. During the lunch hour, when the number of trades decreases, the volatility decreases. This is often reflected in the activity on the tick charts. During low activity periods, tick charts only display a few bars.

This is a better measurement of volatility because on the time-based charts you’ll continue to see the less important candles.

Look at the tick chart above. As you can see, the first day was a low volatility day, with few bars plotted on the tick chart. The second day was a high volatility day, with large price movements and a very high number of bars.

This represents an important information for a trader. During the first day, a trader might skip a signal occurring towards the end of the trading session, knowing that the market volatility is low.

Clearer Swings

Without the accumulation of small candles like the ones on the time-based charts, tick charts make it easier for the trader to spot swings.

Also, while during high volatility periods time-based charts may show only a long candle, tick charts show several smaller candles. In this way, tick charts provide traders with more information about the recent market swings.

When the volatility increases, a tick chart shows more price waves and traders are able to properly identify proper support and resistance levels.

Above we have a 5-minutes chart, showing the market reaction after a news announcement. This was a 100-points move in just five minutes. Let’s compare it with a 200-tick chart of the same move.

As you can see, the large 100-points candle was plotted on the tick chart as 5 green candles. A trader analyzing the tick chart had the possibility to join the upward movement, while the 5-min trader was unable to get his signal.

Better Visualization of Breakouts

With tick charts, traders are able to spot breakouts faster than using a time-based chart. By using tick charts, traders can open a position faster and at a better price level.

Look at the chart above. Let’s say that trader A uses the 5-min chart and sits in front of the screen waiting to trade an upside breakout. The breakout finally occurs, but trader A waits for the price to retrace to the former resistance level.  That’s the conservative way to trade breakouts, to always wait for the breakout to be confirmed by a pullback.

But the pullback never came. The market continued to go higher. Despite the fact that he anticipated the breakout and lost a lot of time waiting for the setup, trader A missed a great trade.

Trader B was watching the same setup. The only difference was that he used a 200-ticks chart when analyzing the market. He saw the breakout and he entered long once the price retraced to the former resistance level, which became resistance.

The tick chart allowed him to see this price movement and he profited from it. The big red candle which followed the green breakout candle was visible on the tick chart, but on the time-based chart wasn’t.

This little aspect made the difference between a successful trade and a wasted opportunity.

More Accurate Signals from Technical Indicators

When using tick charts, traders receive more accurate signals from the technical indicators they use. This is due to the fact the market noise is reduced, so the signals generated by indicators have more relevance.

Also, during periods of high volatility when the indicators plotted on time-based charts are not showing the exact picture of the market, tick charts offer traders better signals.

Take a look at the Dow Jones Index 200-ticks chart. We plotted the Stochastic Oscillator with 8.3.5 settings for this example. Look at the 2 divergences visible on the indicator when using tick charts. Now, let’s see the same evolution, on a 5-minute chart.

Now that’s a drastic difference. As you can see, no divergence is shown on the 5-min chart. Also, look at the choppiness of the Stochastic indicator. Compare the signals offered by this chart with the ones generated by the tick chart and see which ones are tradable.

The conclusions are evident: the Stochastic indicator is smoother on the tick chart and offers more relevant signals.

Better Measurement of Volume

A volume indicator plotted on a tick chart will offer you a better understanding of the strength or weakness of a price move.

As each bar has the same number of determined trades, a higher volume could indicate the presence of smart money.

So, the combination of tick charts and volume could help traders to join strong moves and avoid moves that show weakness.

Tighter and More Accurate Stop-Loss Orders

Tick charts provide additional information to a trader that can help him in placing stop-loss orders and take-profit levels on the chart. This is especially useful during periods of high volatility and rapid price movements.

For example, when a market moves rapidly during a news announcement, within the first minute or two, the tick chart may plot multiple price swings which can be used for placing stops and profit levels.

By using a time-based chart, a trader can place its orders taking into account only one-two bars. These bars won’t offer the same levels. So, automatically, when using time-based charts you use higher stop-loss orders, based on the swings on the respective chart.

With tick charts, not only that you will be able to see more waves and more entry points to set your orders, but you will also use tighter stop-loss orders.

Look at the Dow Jones Index chart above. If a trader A wanted to short the market, a stop-loss of 75 points was required to enter a trade. That’s a big stop to be used on the 5-minutes chart.

Now let’s look at the same situation on the 200-ticks chart.

Trader B was able to short the market at a much better price, compared to trader A. Trader B gained from the start 10 points, as it shorted the market early.

Also, trader B placed its stop-loss order above the recent bar, at 30 points distance, compared to the 75 points stop-loss order placed by trader A.

As you can see, with tick charts you get better entries and tighter stop-loss orders.

Tick Charts Tactics

Tick charts will allow you to go a little bit deeper into the charts and have that volume displayed more on your charts compared to a normal time-based chart. Tick charts are very simple to use and very effective when measuring market momentum and trend strength.

This type of charts is especially useful for short-term traders. Thus, tick charts are often used in scalping and day trading strategies. Although they can provide valuable information for swing trading, most swing traders rely on the time-based charts.

Also, keep in mind that tick charts come with several limitations. Tick charts can give you an advantage in day trading, but they come at a cost as not many brokers are offering free tick data. Quality tick data can be really expensive and not always is 100% accurate.

If you have the chance to compare tick charts from different data feeds, you may notice that they differ. Some data feeds contain errors and not all ticks are included. This can affect your results drastically.

So, although it has its advantages over a candlestick or line chart, a tick chart should be used as a complementary tool. Although you can use only tick charts in your trading activity and record excellent results, it’s better to combine them with the classic time-based charts. This way, you have the full picture of the market. You get the best of both worlds.

A common technique used by traders is to spot trends and support and resistance levels on the time-based charts and pinpoint the entries on the tick charts. This way you reduce the market noise, determine the volatility and take the signals on the tick charts while confirming the movement with the help of time-based charts.