Last Updated on September 3, 2023
Time-based charts are usually the go-to charting method. That is why, for many traders, tick charts remain a mystery. However, a tick chart has a lot to give, and learning how to use it properly can unravel an entirely new way of looking at market data, open more trading opportunities and ensure more complete coverage of the traded instrument.
This guide will go through everything you need to know about tick charts, including what they are, how to read them, and which are the most popular tick chart trading strategies. We will compare tick charts with other charting methods to explore where they shine and fall short. Most importantly, we will also try to answer the common question of which is the best tick chart for day trading.
What Are Tick Charts?
Tick charts represent intraday price action that creates a new bar (candlestick, line, etc.) every time a certain amount of transactions gets executed (ticks).
The trader can specify the number of transactions at which a new bar will be printed based on their preferences. For example, a trader in highly-liquid markets won’t want to have a new bar for every 100 transactions. Instead, they would opt for higher numbers (e.g., a bar every 1,000 transactions) to ensure the chart doesn’t get too messy.
While the number of transactions required to print a new bar is up to you to decide, there are some common levels that most traders use. These intervals are derived from the Fibonacci numbers, including 144, 233, 610, etc. However, if you find another tick basis that works better for your strategy, you are free to adjust your chart.
Note that the transactions in each tick can include both small and large block orders. For example, no matter whether the trade is of just one contract, or 100,000 shares, each trade counts once. In that sense, a bar in a 1,000-tick chart will represent 1,000 trades regardless of size (below is an example of a 1,000-tick chart).
To get more context about the size of the orders included in each tick, it is essential to complement tick charts with volume data.
Tick charts help gather information about the ongoing market activity, showing when traders are the most active when the market is sluggish or barely moving.
Tick charts are an alternative to time charts. While the former use the number of transactions as a basis, the latter relies on a fixed time interval (e.g., hourly, daily, etc.)
How to Read Tick Charts
The best way to learn how to read tick charts is by doing. Make sure to open a demo account where you can test how tick charts work in practice and how suitable they will be for your trading strategy. Only that way can you understand how price moves, how liquidity affects price action, and how to mitigate slippage.
However, here are some things you should know before that.
Reading a tick chart is similar to how a trader reads other charts – you can still look for support and resistance, price breakouts, and trends. The main difference is that with tick charts, you are looking at transaction-level measurements.
For easier comprehension, let’s say that we want to have a new bar created for every 100 trades. This is called a “100-tick chart.”
A 100-tick chart can result in very high or very low price action volatility, depending on the market. If the asset is highly-liquid, the ticks will be formed very quickly, meaning the price action will be smooth. On the other hand, for less liquid assets, it might take a couple of hours or even days for 100 transactions to be executed, meaning there might be a considerable time interval between the formation of each tick on the chart.
Bear in mind that with tick charts, more often than not, you will be looking at ultra-short-term trends and micro-movements. However, it is essential to also keep track of the broader picture since being too focused on the short-term trends, you might end up missing the stronger support and resistance levels.
Using Tick Charts For Day Trading
Day traders specialize in making small profits on a large number of trades and avoid keeping positions open overnight. That is why they usually favor more volatile instruments. Tick charts are a great tool to complement day trading strategies.
In a nutshell, tick charts can help day traders uncover profitable market opportunities during periods of high and low market activity. For instance, when the market opens, the volatility and activity are usually both high, and bars can be printed very quickly – even one per minute at first. On the other hand, during lunchtime, pre- and after-hours trading periods, a single tick might take hours to form.
Day traders fancy using tick charts since they can be adjusted based on the sensitivity and aggressiveness of the trading strategy. For example, tick charts can be set to print a bar on a very small number of trades. The exact number would depend on the individual asset since more liquid securities would have a higher rate of bar printing.
Since it is typical for day traders to aim at capturing even smaller market opportunities, they can look for breakouts at the level of even very small transactions. This allows them to make profits even throughout the least active times (e.g., lunch times), when very few transactions occur.
On the other hand, a trader who prefers trading larger intervals of ticks can adjust the chart to print a bar every 1,000 or 2,000 ticks.
This flexibility is why tick charts make it easier for traders to adjust to periods of high or low volume and volatility.
Below is an example of how to switch to tick charts on the Finamark trading platform.
Tick Charts Trading Strategies
In the general case, when using tick charts, it is better to stick to patterns that reflect basic supply and demand on a micro-scale and the typical support, resistance, and breakout levels.
Tick charts can give you heads-up about potential breakouts and help you capture the rally at its earliest point.
The bar can show you a surge in activity, especially if combined with a volume-measuring indicator and signal potential entry points at the bar’s close.
Furthermore, since tick charts “adapt” to the market, they help eradicate the whipsaws, typical for time charts, by compressing periods with low trading activity, such as during lunchtime, pre- or after-hours. This allows for a more consistent analysis between trading sessions since you will have fewer bars due to the lower trading activity.
Tick Charts and Volume Histogram
This setup is a great one to consider if you want to uncover the complete picture of the market activity.
While the tick chart indicates the number of trades, the volume histogram signals the number of contracts.
When plotted on a tick chart, the relative size of the volume histogram indicates the average trade size. A large average histogram size signals the potential presence of institutional investors. On the other hand, if the histogram retains low levels, the trades’ sizes also are small and a possible indicator of retail trading.
Here is an example – if you have set up the tick chart to print a bar for every 1,000 trades and the average number of contracts in each trade is 5, then the volume histogram will have a value of 5,000.
Volume indicators, as a whole, can be very helpful when trading on tick charts since they can help you confirm the levels at which buying or selling is taking place. Large positions will always be reflected in larger volume bars, which can confirm the market’s next upward or downward move.
When trading the E-mini on a tick chart, as per the example below, the volume histogram helps confirm the signal we get from the price. It reveals that there is sufficient volume to confirm that we can buy the dip or sell the rally as the market will embrace in the other direction.
Tick Charts and the RSI
If you aren’t familiar with the RSI, make sure to read our dedicated guide.
The RSI can be very helpful when used on tick charts for day trading and during periods with increased trading activity.
Traders might consider monitoring the RSI for continuation signals after the overbought/oversold levels are reached. In the example below, you can see that when the RSI gives an overbought/oversold indication, which is also backed by the tick chart and an increase in trading volume, the market reverses.
Advantages of Trading Tick Charts
There are various reasons why one would prefer trading with tick charts.
First, a tick chart helps with noise reduction since each bar is created equal, and there are no bars with low activity. That way, you can prevent yourself from considering market noise for signal and trading on it.
Also, if you combine volume with tick charts, you can ensure that all ticks on the chart are equal in size. This means you will be able to find out when price movements are backed by high volume, indicating the profile of investors dominating the market (e.g., you will notice once smart money starts stepping in). Knowing which trends are backed by institutional investors and which ones result from retail investors’ activity, you can predict potential reversals or continuations.
Tick charts can also help you smooth pre-market and after-hours trading volume. Usually, the activity during these hours is more fragmented, but tick charts can help you better understand it.
Some traders use tick charts to identify trend exhaustion periods. By giving equal weight to each candle’s activity level, tick charts can reduce the chance of false trend continuation bars/candles (e.g., those that are just low-volume trading in the direction).
Probably the most significant advantage of tick charts is that they allow you to trade price breakouts on the level of each transactional tick, enabling you to capture even the slightest movements.
Also, during slow and range-bound markets, tick charts can help you avoid the whipsaws that you can expect from other charts (e.g., time-based charts). The reason is that you will have a tick only after a certain amount of trading activity has been conducted.
Comparing Tick Charts to Other Charting Methods
For best results, traders often blend several chart types. These might include:
- Time charts
- Tick charts
- Volume charts
- Range (Renko) charts
However, switching between tick and time charts, for example, won’t always work seamlessly since different charts will give you other signals based on the market scenario and your trading system.
It is essential to note that, unlike time charts, tick, volume, and Renko charts are considered data-based. Alternatively, they take into account certain aspects of the trading activity when printing new bars/candles.
That is why it is essential to understand the different types of charts and what situations they are best suited for. Now, let’s find the answer.
Tick Chart vs. Time Chart
While ticks form only based on a number of transactions, time charts form a new bar/candle based on a particular time frame (e.g., every 15 minutes, every hour, every day, etc.)
This fundamental difference is why the charts are suitable for different trading scenarios.
On a time-based chart, for example, there’s a huge difference between the opening bar and a random bar at lunchtime, despite both representing the same time frame. The difference is the trading activity that happened during those periods. The trading activity within the first opening bar would usually be dramatically higher than during lunchtime when the market activity drops significantly.
With time charts, one bar will print at the end of the specified time interval. In the case of a 60-minute chart, bars will print at 9:30, 10:30, 11:30, etc., until the end of the trading session. This means there will always be the same number of bars per trading day when using the same time interval. And this is the main argument against time charts. Tick chart proponents argue that time is an inadequate basis for charting since it is irrelevant to how the market moves. Due to this, the rate at which the bars are created is considered a way more reliable indicator of market activity.
It makes sense to switch to a tick chart during slow, range-bound markets, where a time-based chart will just whipsaw you. Using a tick chart allows you only to make trades after a certain amount of market activity has already happened.
Tick Chart vs. Volume Chart
Many investors use tick and volume charts together. Although they are quite similar, the devil is in the details, and if you don’t take these details into account, you might end up skewing the signals you get from the chart.
We already said that tick charts print new bars/candlesticks based on a pre-set number of transactions. However, they can’t reflect the size of the order. For example, tick charts consider an order for 100,000 shares and an order for a single share as one transaction. As you can see, this highlights the biggest imperfection of tick charts – you can’t get the entire picture of the trading activity.
This is where volume charts come into play. A volume chart will print a new bar/candlestick based on the total number of contracts traded. For example, a 1,000 volume chart will print a new bar for every 1,000 contracts/shares traded, regardless of whether it would take 5 or 500 trades to happen. On the other hand, the tick chart will print a new bar for every 1,000 transactions, regardless of the number of contracts/shares they included.
Switching between tick and volume charts is a great way to ensure a bird-eye view of the market activity, including the number of transactions and their size.
Tick Chart vs. Range (Renko) Chart
Range charts use price direction as their sole basis. They print a new bar for a pre-determined price movement, regardless of whether it is up or down. For example, you can set your Range chart to create a new bar each time the traded instrument moves 50 points up or down.
As you already know, tick charts consider only the number of trades, regardless of the price direction.
Range charts are an effective way to look at price action. They are a good indicator of volatility and can work really effectively when combined with volume and tick charts.
Conclusion
When discussing chart types, it is worth noting that there isn’t necessarily one that is “the best.” Instead, different charts are suitable for different market scenarios. Due to this, the more chart types you master, the more trading opportunities you will be able to find.
Tick charts are a great tool to have in your toolbox if you want to find good entries or breakouts. However, note that they aren’t a magic wand that will dramatically transform your trading activity on its own. Instead, they are just a different way of looking at the market data. Whether tick charts would work for you depends on your trading strategy and goals. Fortunately, tick charts are highly-customizable and very flexible, so the best thing to do is to experiment with their set-up in a demo account to see how to fine-tune them to best fit your strategy.
