Tick Charts are one of my “secret weapons” and here’s why.
Tick Charts 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?” Ken
Well I consider myself a little bit of an expert on tick charts, so here goes.
What is a Tick Chart?
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:
1. Tick Charts allow you to follow the Professionals
Large Average Trade Size = Professional Activity
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.
The 2,097 tick chart above has some of the high value bars highlighted – these show large average trade sizes or Professionals. As you can see, you want to follow the Professionals. They were buying the dips and shorting the rallies.
2. Tick Charts allow you to fade the Amateurs
Small Average Trade Size = Amateur Activity
Similarly, looking out for low value bars allows you to identify what the Amateurs are doing. The 2,097 tick chart above is exactly the same as the previous chart but with some of the low value bars highlighted. These show small average trade sizes or Amateurs. As you can see, you want to fade (i.e. do the opposite of) the Amateurs. They were shorting the dips and buying late into the rallies.
Now I think that information alone would be reason enough to use tick charts, but there’s more …
3. Tick Charts let you get a jump on breakouts
Tick Charts Are Quicker Into Breakouts
If you’re waiting for the close of a bar to enter a trade, say a breakout, a tick chart will get you in earlier. The chart above from yesterday’s Emini trading activity illustrates the point. The Emini spiked up on FOMC-related news. Using a tick chart you could see the surge in activity and enter at the bar’s close – say 779. With say a 3 minute chart the entry on close would have got you in closer to 784 – or 5 points worse off!
“Hi Barry, I used to use 1 min, 5 min, 15 min charts etc. but found time to be inadequate due to changes in volatility. I would be profitable for 2 months and then boom, volatility spikes up and all of sudden, my trading is not good. Switching to 1500 tick and 4500 tick has completely masked the volatility differences and allows me to trade more consistently regardless of the volatility.” John G.
4. Tick Charts let you “see” more cyclical information
Tick Charts Have More Cycle Information
A tick chart will also allow you to “see” more trade information and work particularly well with cycle analysis. In the example above, the Better Sine Wave, my preferred cycle analysis tool, was able to pick out a Pull Back long entry point in the 2,097 tick chart. However, with the 3 minute chart the Pull Back was completely missed.
5. Tick Charts compress low activity periods
Tick Charts Compress Low Activity Periods
Lastly, a tick chart compresses low activity periods, like lunch time and after-hours. This reduces whipsaws and allows more “continuous” analysis between days, with trades setting-up pre-open on a tick chart. Or fewer false break-out trades during lunch time.
The CME made some changes to their Emini data feed in October 2009. As a result I’ve changed my multiple time frame tick chart settings from: 233, 699 and 2,097 ticks to: 500, 1,500 and 4,500 ticks.
For the other “mini” symbols I suggest using the following tick chart settings:
- NQ (mini-NASDAQ) – 150, 450 and 1,350 tick
- YM (mini-Dow) – 100, 300 and 900 tick
- TF (mini-Russell) – 100, 300 and 900 tick
- EMD (mini-S&P Midcap 400) – 25, 75 and 225 tick
The CME introduced a new data feed protocol in December 2014 and all data feed providers have to implement it by October 2015. So far only CQG/Continuum has switched over but TradeStation has announced they will switch in August 2015 and other data providers will follow suit.
The new data feed appears to revert back to the pre-October 2009 situation (or close to it), with trades “bundled” and allocated to the “aggressor”. The “un-bundled” order details appear to still be available in the raw data feed but this information might be ignored by data feed providers when they disseminate their data. You can read more about the details in this forum thread and this blog post.
The result is that the average Emini trade size has increased by a factor of approx. 3.1 (based on CQG and TradeStation data for Tuesday 26 May 2015). So if you use CQG/Continuum data you might want to change your Emini tick charts to: 150, 450 and 1,350 ticks.
The new CME data feed (MDP 3.0) turned out to be a ‘storm in a teacup’.
The early mover, CQG/Continuum, switched back from bundled to un-bundled data after, what I assume was, trader outcry. All the data providers, except eSignal, seem to have adopted un-bundled data and there appears to be almost no difference between pre- and post-MDP 3.0 data. The average trade size is virtually identical and Better Pro Am continues to identify Professional and Amateur activity.
If you are an eSignal user, we recommend using a 200 tick bar chart instead of a 500 tick bar chart, etc. The bundling of data appears to add a factor of 2.5 with tick charts.
Otherwise, no changes are required to tick chart settings.
Tick Charts are now possible for trading Forex
With “traditional” cash Forex charts we only know the number of trades during a period of time and not the number of contracts traded. So on a tick chart when we plot volume there is no trade volume size. If you want volume information on a cash Forex chart you’ll have to stick with conventional time-based charts and plot tick count as a proxy.
However, there is another option – futures Forex contracts traded on the CME. These contracts have grown quickly and are now large enough that they are representative of what happens in the cash Forex market. The advantage of these futures contracts is that complete volume data is available and tick charts work great.
There’s more information on using the ‘Better’ series of indicators on Forex charts here.
You’ll never match Tick Charts from different data feeds
No two tick data feeds are the same. This is why you’ll never get 2 tick charts using different data feeds to match up exactly. On time-based charts, for example a 5 minute chart, there’s not normally a problem. The data from the exchange is time-stamped and your charting platform uses this to draw the bar.
However, with a tick chart, new bars are drawn based on the number of trades that have been completed – and this trade count can be:
- Filtered by the data feed provider
- Aggregated to reduce bandwidth requirements by the data feed provider
- Missing trades because of momentary Internet disconnects
- Processed out-of-sequence because of multi-threading on your computer, etc.
Frustrating – I know. But that’s life in the big city. However, for me the advantages of a tick chart far outweigh these negatives.
A common question about Tick Charts on TradeStation
I get a lot of emails from traders asking why their volume indicators don’t look right on a TradeStation tick chart. For example, volume histograms that are all the same height. This is easily fixed.
Right click on the chart > select Format Symbol > go to the Settings tab > under For Volume Use you’ll see a pull-down menu > change the setting from Tick Count to Trade Vol. Now the volume indicator on your tick chart will reference the trade volume data instead of the tick count data.
Don’t use Interactive Brokers (IB) data for Tick Charts
Lastly, the IB data feed available via their Trader Workstation Software (TWS) is not a true tick-by-tick data feed. IB provides snap shots of the trade data several times a second with an aggregate of the trades that took place during that interval. As a result time-based charts (e.g. 5 minute charts) will be correct, however, a tick chart will not.
This article should have convinced you to use tick charts:
- Professional and Amateur activity can be seen. With a tick chart you can judge the average trade size being traded and hence identify the Professionals and Amateurs.
- The disadvantages of time-based charts are overcome. Tick charts help you get a jump on breakouts, let you “see” more cyclical information and compress low activity periods.
- Tick charts are now possible for Forex trading. Getting complete volume data has always been a problem for Forex. The CME futures contracts for Forex are the answer.
- Tick charts will never match between different data providers. This is just a fact of life. It’s not ideal but in no way should dissuade you from using tick charts.
I hope you found this article about tick charts helpful.