While charts are extremely useful for identifying market trends and possible levels of support and resistance, they do have their limitations. Perhaps the biggest limitation of a traditional chart is the fact that it doesn’t depict volume, but rather just prices for a set time period.
That’s where the tick chart comes in.
A tick chart is drawn based on the number of trades rather than a specified time period. For example, a five minute candlestick chart will complete one candle every five minutes. A 2097 tick chart, on the other hand, will complete one candle every 2097 transactions.
Some popular settings for tick charts include:
- 144
- 233
- 610
- 2097
One setting is not necessarily better than another. Traders will use settings based on their trading style and methodology.
A tick chart has several advantages. These include:
- The ability to gauge volume: If you put a volume indicator on a tick chart, you may see where institutions are buying or selling. Because each bar has the same number of trades, much heavier contract or share amounts could be indicative of institutional activity.
- See breakouts quicker: A tick chart may potentially signal a breakout faster than a time-based chart. This may potentially allow a trader to get into a move faster and possibly at a better price level.
- Compression: A tick chart compresses low activity periods like lunch and after-hours trading. This may potentially enable a trader to get a clearer picture of overall price action and avoid being whipsawed.
Tick charts provide a different perspective on price action than traditional time-based charts. These charts may provide additional information to a trader that can help in making entries and exits, as well as gauging overall market activity. If you have not previously used a tick chart, you may want to consider examining a tick chart during market hours to get a feel for how they work. Tick charts may be especially useful for short-term traders and can add another dimension to your trading strategy.
