Many traders work with intraday price charts based on time intervals that include 5-minute, 15-minute or 60-minute. This categorization means that one bar, whether candlestick or OHLC (open-high-low-close), will print at the end of each specified time interval. For example, bars on a 60-minute chart will print at 9:30, 10:30, 11:30 and so on until the end of the NYSE or NASDAQ regular session. Time is the only consideration in this computation, meaning that volume and trading activity has no bearing. Thus, there will always be the same number of bars per trading day when using the same time interval.
Data-based chart intervals allow traders to view price action from various data intervals instead of time intervals. 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 display a specified number of transactions.
- Volume charts indicate when a certain number of shares or contracts have traded.
- Range bar charts represent when a pre-determined 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.
- For traders using technical analysis, data-based chart intervals are an effective way to look at the price action from a number of intervals, rather than just from time intervals.
- Tick, volume and range bar charts are data-based interval charts, as they all print a bar at the end of a set data interval, rather than when a certain amount of time has passed.
- Tick charts show a set number of transactions and let traders gather information about market action.
- Volume charts show the actual number of shares that are being traded by market participants at any given time.
- Range bar charts speak to volatility by showing traders when a certain amount of price movement has happened.
Tick charts 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, or sluggish and barely moving. For example, one bar will print after every 144 transactions (trades that occur) on a 144-tick chart. These transactions include small orders as well as large block orders. Each transaction is counted just once, regardless of the size. More bars will print in periods of high market activity. Conversely, fewer bars will print during periods of low market activity. Tick charts provide a logical way to measure market volatility.
Fig 1: Tick Interval Chart
Unlike time-based intraday charts based on a set amount of minutes (5, 10, 30 or 60 minutes, for example), tick chart intervals can be based on any number of transactions. Frequently, the interval of tick charts is derived from Fibonacci numbers, where each number is the sum of the two previous numbers. Popular intervals based on this series include 144, 233 and 610 ticks.
Volume charts are based solely on the number 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 examine how fast a market is moving by noting how many (and how quickly) bars are printing.
For example, one bar will print after every 1,000 shares have traded on a 1,000-volume chart, regardless of the size of the transactions. In other words, one bar might comprise several smaller transactions or one larger transaction. Either way, a new bar begins to print as soon as 1,000 shares have traded.
Fig 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 exchange-traded funds (ETFs), contracts when applied to the futures/commodities markets and lot sizes when used with forex. Volume intervals are often scaled to the characteristics of an individual symbol because securities that trade 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).
Range Bar Charts
Range bar charts are based on changes in price and allow traders to analyze market volatility. For example, a 10-tick range bar chart will print one bar each time there are 10 ticks of price movement. So, if a new bar opens at 585.0 in this example, 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.
Fig 3: Range Bar Chart
A benefit to using range bar charts is that fewer bars will print during periods of consolidation, reducing market noise encountered with other types of charting. These bars deliver the same price information as time-based intervals, often allowing traders to pinpoint entries with greater precision.
Choosing a Data Interval
Choosing the right interval depends on your style of trading. If you are looking for bigger moves and plan on staying longer in a position, consider larger data intervals. Conversely, if you trade for smaller moves and like to be in and out of a position quickly, consider smaller data intervals. There isn't a single perfect setting that covers every trading style and personal preference. Figure 4 shows a comparison between tick, price, and range bar charts.
Fig 4: Tick Bar Vs. Range Bar Activity
The Bottom Line
Data-based chart intervals can be beneficial because they allow market participants to view charts that are driven by factors other than time. As with all trading tools, these charts must be set to accommodate the market participant's own style and strategies. Traders may find it helpful to experiment with different data types and intervals to find the combination that best suits their methodology.