Tick Chart Trading: How It Works and When to Use It

What is a Tick Chart in Trading?

In trading, a tick chart is a type of price chart that plots new bars or candlesticks based on a specific number of trades, or "ticks," rather than a fixed time interval. This means a new bar is drawn only after a predetermined number of transactions have occurred, regardless of how long it takes.

By focusing on the frequency of trades, tick charts offer a unique perspective on market activity and price movement, providing a more granular view of order flow than traditional time-based charts.

How to Use Tick Charts?

Using tick charts effectively requires a good understanding of market dynamics and the ability to interpret price movements. Here are some general steps to follow when doing tick trading:

• Determine the tick range: Depending on the security you are trading, you can choose a tick value that suits its volatility. The tick range can be higher when trading highly liquid stocks or indices and lower when trading less liquid securities.

• Identify patterns: Scan for familiar patterns on the tick chart, including triangles, channels, support, and resistance levels that can serve as signals for entry and exit trade.

• Combine indicator: Traders may combine tick data with technical indicators such as moving averages, oscillators, or volume indicators to improve trading signals.

• Manage risk: The most critical aspect in trading is stop-loss orders; stock trading systems require traders to create a trading plan.

Tick vs Time Chart

Tick charts look like time charts but measure trades (ticks) per bar instead of time. This provides a more granular view of market activity, showing market pace regardless of time.

Taking the above into consideration, it is pivotal at this point to look at the main features of each type of chart – time vs. tick chart:

Benefits of Using Tick Charts

This unique approach offers several compelling advantages for traders:

• Focus on Activity: Tick charts directly reflect market activity and order flow, rather than just the passage of time. This can be particularly useful in fast-moving markets.

• Granular Price Movement: They can show more detailed price movements during periods of high volume and activity, revealing nuances that might be missed on time-based charts.

• Adaptive to Volatility: Tick charts automatically adjust to market speed. During slow periods, bars form slowly, and during volatile periods, they form rapidly, giving a clearer picture of when significant trading is occurring.

• Identifying Support and Resistance: Because they highlight areas of high trading activity, tick charts can sometimes reveal more precise support and resistance levels.

• Trading Specific Strategies: Certain trading strategies, particularly those focused on momentum and short-term price action, can be more effectively executed using tick charts.

• Filtering Out Noise: During very slow periods, tick charts will show fewer bars, effectively filtering out the "noise" of minimal price fluctuations seen on time-based charts.

Different Types of Tick Charts

While the basic concept of a tick chart is straightforward, there are variations in how they are implemented and displayed:

Standard Tick Charts

These are the most common type, plotting a new bar based on a fixed number of trades. The open, high, low, and close of each bar represent the price range and closing price within that specific number of trades.

Volume Tick Charts

Some platforms offer volume tick charts, where a new bar is formed based on a certain amount of traded volume, rather than just the number of trades.

This can provide an even more granular view of market activity, emphasizing periods where significant capital is changing hands.

Range Tick Charts

Similar to range bars, range tick charts plot a new bar when the price has moved a predetermined distance, but they also incorporate the number of ticks within that range.

This combines the benefits of range-based charting with the activity-based focus of tick charts.

Things to Consider with Tick Charts

1. Choosing the Right Tick Size: The number of ticks per bar significantly impacts the chart's appearance and interpretation. Experiment with different tick sizes to find one that suits your trading style and market conditions.

2. Volume Confirmation: While tick charts are volume-based, they don't directly display the size of each trade. Utilise supplementary volume indicators for a more comprehensive understanding of market activity.

3. Timeframe Context: While tick charts offer valuable insights, it's crucial to maintain perspective on the broader timeframe. Combine tick charts with traditional time-based charts for a well-rounded analysis.

Tick Chart Trading Strategy

Here are some common tick chart trading strategies, categorized for clarity:

Volume-Based Strategies

• Volume Spikes: Identifying periods of high volume on a tick chart can signal increased market activity, potential breakouts, or shifts in momentum. Traders might look for a cluster of ticks forming quickly with significant volume as a potential entry or exit signal.

• Volume Divergence: Comparing the volume on a tick chart with price movement can reveal divergence. For example, if price is making new highs but volume is decreasing, it could suggest weakening momentum and a potential reversal.

• Volume Accumulation/Distribution: Observing whether volume is increasing on up ticks (accumulation) or down ticks (distribution) can provide insights into the underlying buying and selling pressure.

Momentum Strategies

• Tick Speed and Density: Fast-moving ticks (high density) often indicate strong momentum, while slow-moving ticks (low density) might suggest consolidation or a lack of conviction. Traders can use changes in tick speed to anticipate potential moves or reversals.

• Consecutive Ticks in One Direction: A series of consecutive ticks moving in the same direction (e.g., several up ticks in a row) can signal building momentum in that direction.

• Tick Chart Patterns: While not traditional candlestick patterns, traders can look for similar formations on tick charts that indicate momentum shifts, such as rapid bursts of ticks followed by a slowdown.

Support and Resistance Strategies

• Identifying Key Levels: While tick charts don't have traditional bars or candles, traders can still identify areas where price has paused or reversed previously. These "tick clusters" can act as informal support and resistance levels.

• Breakouts from Tick Clusters: A rapid move through a previously established tick cluster can signal a breakout and potential continuation of the trend.

• Testing Support/Resistance: Observing how price reacts when it approaches a previously identified tick-based support or resistance level can provide clues about the strength of that level.

Scalping Strategies

• Quick Entries and Exits: Tick charts are ideal for scalping due to their real-time nature. Traders can look for very short-term opportunities based on rapid price fluctuations and volume changes.

• Following Fast Moves: Identifying and riding short bursts of momentum based on rapid tick movements can be a key scalping strategy.

• Tight Stop-Losses: Due to the speed of tick chart trading, using tight stop-losses is crucial to manage risk.

Order Flow Strategies (Often combined with Tick Charts)

• Analyzing Order Book Data: While not strictly a tick chart strategy, many traders combine tick charts with order book analysis (Level 2 data) to get a deeper understanding of buying and selling pressure at specific price levels.

• Identifying Imbalances: Observing significant imbalances between buying and selling orders in the order book, alongside tick movements, can provide powerful trading signals.

Potential Drawbacks and Considerations

While tick charts offer significant advantages, it's important to be aware of their potential drawbacks and limitations:

Increased Chart Noise (in some cases)

During extremely volatile periods with rapid bursts of trading, tick charts with a low tick count can become very "noisy," with numerous bars forming quickly. This can make it challenging to identify clear trends or patterns. Choosing an appropriate tick count is crucial.

Less Familiarity for Many Traders

Tick charts are not as widely used as time-based charts, so there is less readily available information and fewer resources dedicated to their use. This can require a steeper learning curve for new users.

Platform Dependency

The availability and functionality of tick charts can vary significantly between different trading platforms. Some platforms offer robust tick chart capabilities, while others may have limited or no support.

Interpreting Tick Count

Determining the optimal tick count for a particular instrument and trading style can require experimentation and experience. There is no one-size-fits-all answer, and the ideal tick count may need to be adjusted based on market conditions.

Not a Standalone Solution

Tick charts are best used in conjunction with other forms of analysis, such as technical indicators, chart patterns, and fundamental analysis. Relying solely on tick charts without considering other factors can be risky.

Tick Charts in Different Markets

Tick charts behave uniquely across different asset classes because of variations in liquidity, volatility, and trading hours.

Stocks

Highly liquid stocks like Apple (AAPL) or Microsoft (MSFT) generate a rapid series of tick candles during active market hours (especially near opening and closing bells). This high tick volume allows traders to capture micro-trends and breakout movements quickly.

Forex

In the 24-hour forex market, tick activity varies according to global trading sessions. Tick charts show more activity during overlapping sessions like London-New York. For example, EUR/USD ticks spike between 1 PM to 4 PM GMT.

Futures

Futures contracts (e.g., S&P 500 E-mini) often see large bursts of tick activity during economic news releases, market opens, or expiration dates. Tick charts help traders ride the momentum efficiently during these volatile periods.

Combining Tick Charts with Other Tools

Tick charts become even more powerful when combined with other analytical tools:

• Volume Analysis: Confirm if price movements are backed by real trading volume. A breakout accompanied by heavy tick volume is more reliable than one with low volume.

• Order Flow Analysis: Order flow tools allow you to view buy/sell pressure in real time. When used with tick charts, it helps spot real intentions behind price moves, preventing false breakouts.

• Moving Averages on Tick Charts: Use short-term (e.g., 9 EMA) and long-term (e.g., 50 EMA) moving averages directly on tick charts to define trend direction and pullback opportunities.

Risk Management with Tick Charts

Tick charts can significantly improve your risk management approach:

1. Tighter Stop-Loss: Since tick charts show real-time activity, you can place stop-loss orders closer to technical levels without unnecessary wiggle room.

2. Better Profit Targeting: Monitor momentum closely to maximize profits and exit trades before a reversal begins.

3. Adjusting Position Size: If you notice rapid tick movements, you can scale down your trade size to protect your capital.

Conclusion

Tick charts offer a unique perspective on market activity by plotting data based on trades rather than time, providing a more granular view of price movement and order flow. While requiring careful consideration of tick size and best used with other analytical tools, they are particularly valuable for intraday and momentum-based strategies.

Ultimately, incorporating tick charts can enhance a trader's understanding of market dynamics and improve risk management, especially in fast-moving markets.