Facts About Tick Charts And How They Help Improve Price Action Trading

When trading any market, particularly the ES, we prefer to use tick charts over time based charts.  For this reason, we want to share with you the facts about tick charts and how they help improve price action trading results.  The most important reason we prefer tick charts is because they allows us another window into the price action.  In other words, it allows us to see the price action patterns with increased details.  We already believe that price action is the key to successful trading, and it always helps to use the best tools for any job, and it’s our opinion that tick charts give us the best tool for price action trading.

Trading Tick Charts

Trading Tick Charts

There are a few interesting details that you must know about tick charts though, and one of them that we are asked almost daily by other traders is why their tick charts don’t look exactly like our tick charts.  What you must understand is that because of the way tick charts work, which is simply counting every trade as a tick, that no tick two charts will ever look exactly alike, particularly the bars.

You should be able to get your overall chart patterns and lay outs to look very similar, but it might also take a different tick count chart size, because not all data providers count ticks in the same way either.  Tick charts are an in exact tool from data provider to data provider, so make sure that you understand that so that you do not drive yourself nuts wondering why your tick chart may not look like one of mine, even though you are using the exact same size tick chart.

What we try to do when we look for the proper tick size chart to trade for any market is to open up a 5 minute time chart first.  We then open up different tick size charts until we find one that resembles the 5 minute chart, in regards to patterns, as closely as possible.  Once we find the best fit, that’s the size tick chart we will trade each day in that particular market.  Even though our tick chart is trying to mimic a 5 minute chart, the tick chart will still give us many more details about what’s going on with prices, and the more details we have, the better odds we have at reading the price action properly.  Just remember, if your tick chart bars look different than ours, then that’s OK, as long as your patterns compare closely.  If your patterns do not look the same, experiment with different size tick charts until you can find a very close match and go with that.  There are many different reasons we choose a 5 minute chart as well, but we won’t go into that in this article.

There are obviously other differences between tick and time based charts, but we have already discussed the important ones.  Below is an article we found on tick charts at www.topdogtrading.com.  Continue reading to see what this author had to say about tick charts in the excerpts we included below.

As to the difference between tick charts and minute charts, that’s going to take a little more explanation.

On most charts, each bar represents a period of time.

  • On a daily chart, each bar contains all the price action of that one day, and when the next day starts, a new bar is plotted.
  • On a 5 minute chart, each bar represents all the price action for 5 minutes, and when the 6th minute begins, the chart plots a new bar.

“Tick” charts are different in that each bar does not represent any particular amount of time. A “tick” is a “trade.” So every time someone places a trade, that is called a “tick.”

A 200 tick chart, then creates a bar that includes all the price action for 200 trades. When the 201st trade goes through the market, the chart plots a new bar.

  • When the market is slow, it could take 5 minutes for 200 trades to go through the market.
  • When the market is fast, it could take 30 seconds for 200 trades to go through the market.

So tick charts are a way of incorporating volume into the price bars and price formations themselves.

However, remember it isn’t really measuring volume directly because trades (“ticks”) will have varying amounts of volume. One trade could be for a single contract, and another could be for 50 contracts.

You can also plot “volume charts” in which each bar represents how many contracts (shares) each bar will represent rather than how many trades.  You can read the entire original article here.

So as you can see from Barry’s thoughts above, this is another reason why I don’t use volume indicators, because volume can be inferred in the tick bars by how quickly they form.  While there really isn’t a lot of extremely important information contained in volume, knowing how quickly tick bars are forming does allow you to know if there is momentum or increasing volatility, which is important to us as day traders.

Barry burns goes on to say the following in his article:

I personally prefer tick charts for 2 reasons:

  1. Tick charts tend to create more symmetrical patterns than regular minute charts because when the market is extremely slow, minute charts will continue to plot a lot of small bars that go no where. When the market is fast, it will create very long bars, because it can’t create a new bar until “time is up” (5 minutes, 15 minutes, etc.).
  2. Tick charts often create more narrow range bars than minute charts at turning points, thus allowing me to keep my risk smaller (because my risk is defined by the range of the bars at cycle turning points in the market).
We concur with what Barry is saying here, and these are the very same reasons we prefer to trade with tick charts.  If you are accustomed to trading minute charts, it might take you some time to get used to tick charts, but if you stay with them, we believe that you will eventually agree that they are an ideal way in which to help you improve your trading.  If your goal is to learn to read a price chart, which it should be, then you will find that task much easier to tackle by using tick charts.
In the end, learning to read a chart is the very same thing as price action trading.  If you want to learn to trade like a professional, then you must learn how to understand the language of a chart.  All charts are the same, and they do indeed speak a language, and if you can learn this language, you can learn to trade profitably.  We hope you now have a better understanding in regards to the facts about tick charts and how they can help improve price action trading strategies.  If you are interested in learning how to read a price chart, then you can find more details on our price action trading system at http://priceactiontradingsystem.com/pats-price-action-trading-manual/.