99% of traders use time-based charts for their technical analysis. But in recent years, another chart is becoming more and more popular among day traders and scalpers, as it provides a different perspective on trading than traditional time frames.
What Are TICK Charts?
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, being often used in scalping and day trading strategies.
So, what Are tick charts? well, the bars on the tick charts are plotted based on a particular number of transactions. 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. Now very important, a single transaction could include 1 contract, or 50 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.
The Most Used TICK Chart For Day Trading
With tick charts, the time element is removed. If you are trading on traditional charts, you have limited options. With tick charts, you can backtest and choose your own settings. Some prefer charts with 50, 100 or 200, 1000 or 2000 ticks. Others prefer to use Fibonacci numbers when setting their number of ticks, like 21, 34, 55, 89, 144 etc. Another approach would be to select the tick number on your charts by comparing it to a time-based chart.
For example, if you prefer day 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 50 or 100 ticks will probably suit you. For day trading, 500 or 1000 ticks are the most common used. Of course, there is no best number of ticks to trade with. You just have to test different settings and select the one that suits you.
How To Read And Use TICK Charts In A Trading Strategy?
There are several advantages associated with tick charts, making them a very valuable tool for traders in terms of tweaking their strategy. Some key benefits include:
#1 Less Market Noise
These transaction-based tick charts generate a new bar only after a certain number of trades. This can help reduce the market noise usually translated into irrelevant candles crowding time-based charts. For instance, during a lower-activity period, a time-based chart may be filled with many useless candles, whereas the tick chart will include fewer bars but ones more relevant to the study at hand. This compression of low-activity periods enables traders to pay attention to essential price movements that give a clearer picture of overall price action.
#2 Better Volatility Analysis
With tick charts, new bars are formed only when enough trades have occurred, thereby truly representing volatility. In high activity, such as market opening conditions, tick charts plot more bars and manifest high volatility. On the other hand, during periods of low activity, it plots fewer bars. This contrast helps a trader get a better feel of market volatility than time-based charts showing less important candles irrespective of trading activity.
#3 Clearer Swings
Tick charts remove the noise of accumulation of small candles of time-based charts so that market swings can be more easily identified. During high volatility periods, while a time-based chart may show a single long candle, a tick chart will show multiple smaller candles. This detailed view helps traders identify proper support and resistance levels.
For example, consider a significant announcement that might form several waves in a downtrend on a tick chart; these would provide more entries than only a few big candles on the time-based chart.
#4 Improved Visualization of Breakouts
By nature alone, tick charts allow traders to recognize breakouts earlier than time-based charts. Often, traders get into positions more quickly and at better prices with tick charts. In the case of a breakout, for instance, a retracement to a former resistance level, now serving as support, may be shown on a tick chart that would go undetected on a time-based chart. This advantage thus enables traders to capitalize on the breakouts more effectively.
#5 Get More Precise Signals with Technical Indicators
The signals obtained from the technical indicators are more accurate in tick charts because they reduce market noise. Therefore, the signals obtained from the indicators are of higher significance.
For instance, a divergence indication in a tick chart might be invisible in a time-based chart, thus giving a more precise indication of the trends in the market. Since the signals obtained are smoother, traders can have a better decision-making process at their disposal in the marketplace.
#6 Better Volume Measurement
It can be further refined to understand the the strength or weakness of price moves if combined with any volume indicators. Each tick bar would thus be of equal size, and through volumes, a trader can see which movements are backed by high volume and which aren’t.
It also therefore naturally helps one to identify the trends driven by smart money versus retail money and guides about which moves to follow and which to avoid. More Compact, Accurate Stop-Loss Orders Tick charts make it easier to set better stop-loss and take-profit levels, especially when the market is highly volatile. Unlike time charts, where traders may be demanding larger stop-loss orders, tick charts allow for more price swings, and hence, traders can place stops that are smaller and more accurate.
A 1-minute chart may call for at least a 30-pip stop-loss, while a 50-tick chart may only need 20 pips—this makes quite a difference when using a scalping strategy. In summary, the advantages associated with tick charts are numerous, especially a reduction in market noise, better volatility analysis, clearer swings, quicker breakout visualization, more reliable technical signals, better volume measurements, and the most accurate stop-loss orders. These benefits that the tick charts present make them an essential tool for traders to develop their trading strategies.