We trade with tick charts and we teach all of our day traders to trade with tick charts as well. If you are not yet trading with tick charts, then continue reading to discover why you should learn to trade price action with tick charts only. Once you understand why we like tick charts and discuss some of the advantages that they offer you, we think you will agree.
Traditionally most day traders have traded with time charts, and many traders do not even know about tick charts and many don’t understand the real difference between a tick chart and a time based chart. As you would expect, time based charts are based on time. As an example, if you choose a 5 minute chart, each bar builds for 5 minutes before that bar closes and the next bar will open and start forming. Every bar will build for exactly 5 minutes on a five minute chart.
With tick charts, each bar will build for the number of ticks that you choose. When trading our favorite market, which is the ES, we use a 2000 tick chart. What happens is each bar will be made up of 2000 ticks before it closes and the next bar begins forming. A tick is simply a trade, so one tick is one trade. When using a 2000 tick chart, each bar consists of 2000 ticks. Why we picked a 2000 tick chart is easy to explain as well. When choosing the proper size tick chart for any market, we first look at a 5 minute chart. We then attempt to create a tick chart that looks as close as possible to that 5 minute chart, and that’s what we use to trade that market.
You are probably wondering why we just don’t use a 5 minute chart now, so let me explain. A 2000 tick chart, even one that resembles a 5 minute chart, will have many more price action details than a 5 minute chart. As price action traders, we need to see as many details in the price action as possible, so by using a tick chart, we think we get more details than we do with a five minute chart. Open up one of both charts and see what we mean. If you aren’t trained to read a price chart, the small differences may seem trivial, but if you are an accomplished chart reader and you understand price action, then you will surely see what we mean.
Here is some additional information we found on tick charts at www.emini-watch.com.
Tick charts are brilliant and one of my “secret weapons”. But they are not very well known and can be confusing. From time to time I get questions about tick charts and yesterday’s email from Ken was typical:
“I’ve been scouring the Internet for information on tick charts and their ins and outs – but have found nothing useful. Can you please point me to a good source of information with a decent explanation?”
Well I consider myself a little bit of an expert on tick charts, so here goes.
Conventional (i.e. time-based) charts draw a new bar after a set period of time, for example after every 5 minutes. Tick charts draw a new bar after a set number of trades, for example after every 1,000 trades.
Don’t get confused with the NYSE TICK Index (or $TICK in many charting programs). The NYSE TICK Index is a totally different thing. It measures the number of stock issues trading on an up tick versus a down tick. A tick, by contrast, is just a trade and 1 tick = 1 trade.
I much prefer tick charts over conventional, time-based charts. Here are my 5 reasons:
The Emini is a perfect trading vehicle because we know the number of contracts in each individual trade. So on a tick chart when we plot volume we see the total number of contracts traded during those last say 100 trades. The relative size of the volume histogram shows us the average trade size. Let’s take an example.
If during the last 100 trades the average number of contracts in each individual trade was 2, the volume histogram would show a value of 200. However, if during the last 100 trades the average number of contracts in each individual trade was 25, then the volume histogram would show a value of 2,500. So if the volume histogram is low we are seeing Amateurs trading and if the volume histogram is high we are seeing Professionals. You can see the rest of the original article here.
While we don’t necessarily trade the tick chart for all of the same reasons, you can still see from this article that tick charts to give you an advantage over time based charts. Again, our main reason for trading tick charts is for no other reason than it allows us as price action traders to see many more details in the movement of prices on the chart as they print to it. You normally won’t see any pullbacks or entry points in a strong 5 minute bar, but if that 5 minute bar is broken down into ticks, you may see several pullbacks and each one may give you a great entry signal as well.
We believe that if you want to make money as a day trader, that you will have to learn to read a price chart and understand price action, even if you don’t call it that. Any day trader that is making money consistently every single day is able to read a price chart, even if they don’t call it price action trading. If most new day traders would start with learning price action rather than chasing after a mythical holy grail trading indicator that will make them rich, the the success rate of day traders would very likely increase considerably. Trading is not hard, but learning how to trade properly is hard, and most never get the proper learning information to begin with, because the few traders that actually figure it out are not eager to tell you how they do it.
That’s where we are trying to help you here at PATs with our price action trading course. We once struggled while searching for that mythical holy grail too, and we wish someone would have shared this information with us and saved us a lot of money and time. If you want to learn how to trade with price action, you have come to the right place. If you are sold on the idea of price action trading as the only real way to day trade, then you should now also understand why you should learn to trade price action with tick charts. You can get more information on our price action trading course by going to http://priceactiontradingsystem.com/pats-price-action-trading-manual/.