A tick chart is a different way of displaying market movements that helps many traders to determine the general market direction, the current trend, and future market movements.
So far, when we talked about price charts, we did not clarify which kind of price chart we talked about. This makes sense, since almost all traders use time based price charts. In a time based price chart, a period ends after a certain amount of time. For that period of time, all market movements are aggregated into one candlestick. The amount of trades in that period has no influence on the form of the final candlestick.
There is, however, another method to display price movements. It is called the tick chart. In a tick chart, time is irrelevant. Instead, each period is defined by a certain number of trades. Traders vary the number of periods for each candlestick to get a broader or a more narrow view of the market.
In a Tick-Chart with a frame of 100 ticks, one candlestick displays one hundred trades. If these 100 trades developed over a 30-minute time period, a regular time-chart with a 5-minute time frame would display six candlesticks. Therefore, tick charts and time based charts create different price charts. They form different patterns and accentuate different aspects of market movements.
To understand the difference, pay attention to the volume in a time based chart: Periods with higher volume would be accentuated in tick chart.
Generally, periods with higher volume are more important for future price movements than periods with lower volume. In a time-based chart, this important relationship is not apparent on first sight. Therefore, you have to analyze the volume of each period manually or use technical indicators to find out which periods are more relevant than others.
In a tick chart, however, every period has the same volume. The more periods a movement contains, the more important it is. In several situations, this makes analyzing the market easier:
In a healthy trend, the movement in trend direction usually features a higher volume than the correction in the opposite direction. This means, a tick chart would spread the movement in trend direction over more periods, and reduce the correction to fewer periods.
Because they emphasize the most important part of a trend, some traders find it easier to recognize trends with tick charts. When a trend is losing momentum, this becomes very apparent in a tick chart.
During periods of sideways movement, traders have to find out which way the market will continue once the sideways movement is over. Again, volume analysis can help to make this important decision; and again, tick charts can help to emphasize which direction has more volume.
Unfortunately, tick charts have some disadvantages, too:
With time based price charts, every trader uses one of the standard time frames. Therefore, if you recognize a chart formation in a price chart, many other traders will recognize the same formation and draw the same conclusion from it.
This process helps to reinforce the prediction given by the price formation. Since you can determine what other traders see, you can predict what they will do. Smart traders use this knowledge to find price levels at which many traders will do the same thing, and use the breakout to win a binary option.
With tick charts, however, possible time frames by far outnumber time frames in time-based charts. Whether you use a chart based on 100, 250, or 1234 ticks is entirely up to you. Therefore, one trader cannot predict what other traders see in the market.
Though every trader will generally see the same market movements, there is no way of telling whether another trader’s candlestick will be completed now, with the next 50, or 666 ticks. Therefore, your investment is hard to time. This takes one of the biggest advantages of chart formations away from you.
For similar reasons, tick charts feature only few price formations. Even if you find a hammer or a shooting star, the candlestick is more likely a coincidence than the result of meaningful market movement.
When switching from a time based chart to a tick chart, the right number of ticks for one candlestick is somewhat hard to determine. There is no general rule to know which number of ticks matches a certain time frame.
Therefore, you have to guess. Determining a number of ticks for each period that will display roughly the same movement is easy. It is, however, no exact science. Therefore, it cannot be used to determine the entry point for your investment.
In conclusion, tick charts are a great tool to analyze the market. They can help you understand the general direction, and what is happening on a larger scale. To make investment decisions, especially determining the right entry point, however, you should use time-based charts.