With so many different charts, day traders can select the one that meets their strategies. Tick charts are becoming more and more popular. They can deliver more perspectives compared to traditional charts. Additionally, when used with other time-based charts, they can bring your trading approach to a new level.
In this article, we will speak about tick charts and reasons to use them for your day trading techniques.
A tick chart expresses a specific number of transactions or traders between sellers and buyers. The number of transactions defines the way bars will be plotted on the chart pattern. In simpler words, every bar depicts a predefined number of trades.
Let’s say, we have a 200-tick chart with bars depicting 200 trades per each. Once 200 trades have been completed, the chart will plot another bar. 200 trades can be a part of a single contract between a buyer and seller as well as hundreds of separate contracts between different market participants.
It does not matter how many contracts are included in a single transaction (1, 100, or 500). The creation of a new tick on the chart symbolizes the number of trades but not contracts. This is a very important part of the concept behind this particular type of chart.
We do not need the time element when using tick charts. This is why traders often use them in conjunction with time-based patterns. The main difference here is that typical charts often come with a limited set of options ranging from M1 to W1.
Oppositely, tick charts can be used with individual settings. Traders may choose form 50, 100, 500, or 1000 ticks, What’s more, if you use Fibonacci numbers, you can set other parameters for your ticks (21, 34, 55, 89, etc.):
Different traders apply different approaches strategies. It also means a different number of ticks. So, you will have to define your own via backtesting.
Now, let’s talk about how tick charts can improve your day trading strategies. As stated earlier, they deliver more flexibility though still need to be compared with time-based charts when being configured.
As for their main advantages of using tick charts, they are as follows.
While being transaction-based instruments, tick charts provide less market noise. It can distract traders from the real situation in the market. Besides, the market noise often comes with a false signal interpretation.
The higher the noise, the more complex decisions you will need to make. Trades start losing focus on factors that are of great importance.
Tick charts compress low-activity periods. Instead of generating dozens of useless candles, they offer around 15 of the relevant ones.
The chart will form a bar only in case of enough trades are completed between sellers and buyers. In simpler words, we can see them automatically adjusting to the market conditions.
If the market is active, we will see more bars, which also means growing volatility. This generally happens when the markets open. Once the number of trades has declined, the same happens to the volatility. We will see fewer bars on the chart.
Spotting swings becomes easier, as traders do not have to deal with the accumulation of multiple small candles. Additionally, tick charts generate more information during market volatility. While time-based charts plot a long candle only, tick charts show several smaller candles.
Tick charts make it possible for traders to spot breakouts faster. It provides better chances to open different positions quicker and at a more favorable price level.
Besides, when the market is extremely volatile, time-based indicators usually do not show the full picture. This is where you might need better signals generated by tick charts.
When the price makes a move, one is eager to know how strong or weak that move is. With volume indicators, you will have a better understanding of the situation. While each bar depicts the same number of transactions, increased volume can be the sight of so-called smart money.
To make the most of this situation it is better to use tick charts in conjunction with volume-based indicators. They will help you avoid weak moves and join the strong ones.
Additional data, generated by tick charts, can be used to place tighter and more accurate stop-loss orders. This technique can be especially effective during rapid price movements or extreme market volatility.
Tick charts are a great tool to bring your strategies to a new level. They help traders avoid market noise and generate more accurate trading signals.
When used in conjunction with volume-based indicators, tick charts let traders apply more effective risk-management tools with righter stop-loss orders. However, they still require proper organization and backtesting to ensure everything works smoothly.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.