Traders are used to seeing intraday price charts based on time intervals, such as five-minute or 60-minute charts. This means that one bar (be it a candlestick or OHLC bar) will print at the end of each specified time interval. On a 60-minute chart, for example, a bar will print at 9:30, 10:30, 11:30 and so on until the end of the trading session. Time is the only consideration; volume and trading activity have no bearing. Thus, there will always be the same number of bars per trading day when using the same time interval. (For more, read Candlesticks Light The Way To Logical Trading.)
Data-based chart intervals allow traders to view price action from various data intervals instead of just time. Tick, volume and range bar charts are examples of data based chart intervals. These charts print a bar at the close of a specified data interval, regardless of how much time has passed. Tick charts show a certain number of transactions. Volume charts indicate when a certain number of shares or contracts have traded. Range bar charts represent when a certain amount of price movement has occurred. Let's take a closer look at these data-based chart intervals and how we can use them to our advantage.
Tick charts as seen in Figure 1 are beneficial because they allow traders to gather information about market activity. Since tick charts are based on a certain number of transactions per bar, we can see when the market is most active, and, likewise, we can see when the market is sluggish and barely moving. In a 144-tick chart, for example, one bar will print after every 144 transactions (trades that occur). These transactions include small orders as well as large, block orders. Each transaction is counted just once, regardless of the size. In periods of high market activity, more bars will print. Conversely, during periods of low market activity, fewer bars will print. Tick charts provide an easy means of determining market volatility.
|Figure 1: Tick Interval Chart|
Unlike time-based intraday charts that are typically based on a set amount of minutes (5, 10, 30 or 60 minutes for example), tick chart intervals can be based on any amount of transactions. Frequently, the interval of tick charts is derived from Fibonacci numbers (a series of numbers discovered by Leonardo Fibonacci where each number is the sum of the two previous numbers). Popular tick chart intervals are, therefore, 144-, 233- and 610-ticks. (To learn more, see Taking The Magic Out Of Fibonacci Numbers.)
Volume charts as seen in Figure 2 are based solely on the amount of shares, or volume, that is being traded. These bars may provide even more insight into market action because they represent the actual numbers that are being traded. Similar to tick charts, we can get an idea of how fast a market is moving simply by noting how many (and how quickly) bars are printing. In a 1,000-volume chart, for example, one bar will print after every 1,000 shares have traded, regardless of the size of the transaction. In other words, one bar might be comprised of several smaller transactions or one larger transaction. Either way, a new bar begins to print as soon as 1,000 shares have traded.
|Figure 2: Volume Interval Chart|
It should be noted that volume intervals are relative to the trading symbol and markets that are being analyzed. The volume interval will relate to shares when applied to stocks or ETFs, contracts when applied to the futures/commodities markets and lot sizes when used with forex. Volume intervals are often scaled to an individual symbol since symbols that trade in higher volume require a larger interval to provide relevant charting analysis. Common intervals for volume charts include larger numbers (such as 500, 1,000, 2,000) as well as larger Fibonacci intervals (such as 987, 1,597, 2,584, etc). (For more, see Gauging Support And Resistance With Price By Volume.)
Range Bar Charts
Range bar charts, shown in Figure 3, are based on changes in price and allow traders to analyze market volatility. A ten-tick range bar chart, for example, will print one new bar each time there are ten ticks of price movement (in an instrument where price is measured in ticks; for example, the e-mini Russell). Using the 10-tick range bar example, if a new bar opens at a price of 585.0, that bar will stay active until price either reaches 586.0 (10 ticks up) or 584.0 (ten ticks down). Once ten ticks of price movement have occurred, that bar will close and a new bar will open. By default, each bar closes at either the high or the low of the bar as soon as the specified price movement is reached.
|Figure 3: Range Bar Chart|
A benefit to using range bar charts is that during periods of consolidation, fewer bars will print, thus eliminating some of the market noise encountered with other types of charting. Because fewer bars deliver the same price information, traders may be able to pinpoint trade entries with more precision.
Choosing a Data Interval
If you have decided to try one of the data based charting intervals in your own trading, you may be wondering where to start. Choosing the right interval depends on your style of trading. If you are looking for bigger moves and plan on staying in a trade longer, you should choose larger data intervals. If you trade for smaller moves and like to be in and out of a trade quickly, you might choose smaller data intervals. There is not one best setting; it has to do with your style of trading and personal preference. Figure 4 shows a comparison between tick, price and range bar charts.
|Figure 4: Choosing a Data Interval|
Data-based chart intervals can be beneficial because they allow market participants to see price charts that are driven by factors other than time. Market activity can be more easily recognized simply by the number of bars that are printing. As with any trading tool, these charts must be set to accommodate each trader's own style of trading. Traders may find it helpful to experiment with different data types and intervals to find the combination that best suits their trading method. These different types of charting provide a unique method of viewing the market that cannot be seen through time-based charting techniques. (For more, see Charting Markets Into The Future.)