Chart Basics
Candlesticks and bar charts are the most popular charts used by many traders. Both the candlestick and the bar can provide the trader with the same information. The one primary difference is that candlestick charts are color-coded and easier to see. When using these two types of charts traders can choose to create price bars based on time or ticks. Time and tick charts have benefits and disadvantages for the trader. Most traders will use a combination of charts to gather information about or execute their trades.
One-Minute or Time-Based Chart
Time charts can be set for many different time frames. However, if you are using the chart for active trading you will probably want to focus on short periods. If you use a one-minute, two-minute, or five-minute chart, then a new price bar forms when the time period elapses. On a one-minute chart, a new bar forms every minute, showing the high, low, open, and close for that one-minute period. That creates a uniform x-axis on the price chart, because all price bars are evenly spaced over time. Sixty price bars are produced each hour, assuming that at least one transaction took place in the stock or other asset you are following. One-minute charts are popular among day traders but aren’t the only option.
Tick Chart
The bars on a tick chart are created based on a particular number of transactions. For example, a 512-tick chart creates a new bar after every 512 transactions. You can customize tick charts to the number of transactions you want; for example, five ticks or 1,546 ticks. Throughout the day there are active and slower times, where many or few transactions occur. Therefore, the x-axis typically isn’t uniform with ticks charts. When a market opens there is quite a bit of volatility and action. So, the tick bars occur very quickly. Five ticks bars may form in the first minute alone. During the lunch hour, though, when the number of transactions decreases, it may take five minutes before a single tick bar is created.
The Power of the Tick Chart
When there is a lot of activity a tick chart shows more information than a one-minute chart. This information includes more price waves, consolidations, and smaller-scale price moves. For example, when a market opens several ticks bars within the first minute or two may show multiple price swings that can be used for trading purposes. If using a one-minute chart only one bar forms in the first minute, and two bars after two minutes. These one or two bars may not present the same trading opportunities as the several tick bars that occurred over the same time frame. In this way, tick charts allow you to get into moves sooner, take more trades, and spot potential reversals before they occur on the one-minute chart.
The Power of the One-Minute Chart
When there are few transactions going through, a one-minute chart appears to show more information. For example, suppose you are debating using a 90 tick chart or a one-minute chart. Suppose that during the lunch hour, only 10 transactions occur each minute. It will take nine minutes for a tick bar to complete and for a new one to start. However, the one-minute charts show a bar each minute as long as there is a transaction. In this case, the one-minute chart produces nine times as many bars as the tick chart, showing more price waves, trends, and support and resistance levels that could potentially be traded.
The Illusion of a Trade or a Real Trade
Tick charts “adapt” to the market. Fewer bars form when there are fewer transactions, warning a trader that activity levels are low or dropping. The one-minute chart, on the other hand, continues to produce price bars every minute as long as there is one transaction within that minute timeframe. This may create the illusion of activity, even though there may actually be little volume in the stock, futures contract, or forex pair.
An Example
A chart from TD Ameritrade of the intraday Spdr S&P 500 ETF (SPY) is an excellent example of the difference between using a tick or time chart to trade. Here, the white, time chart lags behind the low notification of the darker, tick chart. The one-minute chart is compared to a 1000 tick chart of the SPY. Both charts start and end at 9 a.m. and 4:02 p.m., respectively. The one-minute chart provides more price bars before 9:30 a.m., but the tick chart creates more price bars during the day—when there is a higher number of transactions—essentially creating a higher “resolution” view of price moves. One chart type isn’t necessarily better than another. Both can be traded effectively using the right day trading strategy, but traders should be aware of both types so they can determine which works better for their trading style.
