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An Introduction to Tick Charts and How to Trade Them in Futures Markets

Originally published at: https://optimusfutures.com/tradeblog/archives/how-to-trade-tick-charts/%20

The following article on Tick Charts is the opinion of Optimus Futures.

Traders use a wide variety of charts to analyze markets. Most charts, however, are time-based, and traders’ cycle through different time frames to match their specific strategy or preferred time horizon.

Longer-term traders may use daily charts to get a sense of the big picture while using hourly charts to plot entries and exits. Short-term traders may go as small as using 1-minute charts to trade price action.

But what if your short-term goal was to trade on the smallest “transaction” level? What if you wanted to trade price breakouts not on the level of time but on the level of each transactional “tick”? If this aligns with your trading objectives, then you might want to consider trading Tick Charts.

What is a Tick Chart?

To understand tick charts, you first need to understand the idea of a “tick.” Second, you have to let go of the notion that charts are bound to time.

A tick is the smallest incremental unit that a given asset trades. In our case, we’re dealing with futures contracts, so let’s examine the S&P 500 and Dow Jones futures.

  • The ES (S&P 500 futures) ticks by a quarter point or 0.25. So if the ES is trading at 2,950.00, then one tick above would be 2,950.25. One tick below would be 2949.75. Note that one full point in the ES equals four ticks .
  • The YM (Dow Jones Index futures), on the other hand, ticks by a full dollar. This is the same as one point, making it so that one point in the YM equals one tick. So if the YM is trading at 26,600, one tick above would be 26,601 while one tick below would be 26,599.

A tick chart can show you the progression of each tick or group of ticks .

While time-based charts measure the price movement within a specific increment of time (like minutes, hours, days, and more), tick charts “move” only when price ticks up or down.

Imagine if the ES, trading at 2950.00, had absolutely no transactions for, say, an hour during the regular market session. Such a scenario would be nearly impossible, but just imagine no buying or selling transactions within an hour. In such a case, the tick chart would appear frozen until the next transaction takes place.

Notice we mentioned above that tick charts can show single ticks or a group of ticks. What difference does it make?

In noisy or fast-moving markets, charts that map each single tick can either move too fast during volatile markets or they can give you too much market noise, charting each single tick-sized transaction that in the big scheme may give you very little meaningful information.

But by grouping ticks together–e.g., 10, 25, 50, or however large you want to make it–the overall shape of the price action may be less noisy and more meaningful. This is why many traders opt to bundle a preferred group of ticks for each chart.

How to Read Tick Charts

Reading a tick chart is similar to reading other charts. Often you will look for support and resistance, price breakouts, and trends. Because you are dealing with transaction-level measurements, you are most likely not looking for meaningful chart patterns (e.g. head and shoulders, cup and handle, etc.) that were designed to reflect patterns stemming from fundamental impetus.

So, when it comes to reading tick charts, it’s important to know how not to read them, or rather, how to avoid certain patterns that were designed to provide information on a more extensive (and fundamentally-driven) manner. In other words, don’t confuse noise for signal, particularly when the signal doesn’t appear as noise–as market randomness often doesn’t look random .

Since you are dealing with lots of market noise when viewing tick charts, you may want to focus strictly on support and resistance, price breakouts, and ultra short-term trends. In short, approach the chart minimally and focus on the price action right in front of you.

By the same token, you might also want to be aware of key price levels on a wider time scale. After all, you don’t want to be unaware of major support and resistance just because you were too focused on the microscale that you couldn’t see the larger context surrounding it.

Look at the image above and notice that support and resistance, breakouts, and micro-trends appear similar to those you’d find in other charts. Since you’re likely dealing with micro movements, you might want to focus on that dynamic alone without adding any other unnecessary theoretical framework on top of it. It’s up to you, but remember that you’re dealing with more indeterminacy in this time frame than other larger time frames.

Also, remember that to get a feel of how tick charts work in real time, and more importantly, to get a sense of how to trade them, you need to experience trading these charts in a live market. Only then can you get a sense of how price moves, how liquidity affects price action, and how slippage can be mitigated or taken into account.

Tick Charts vs Time Charts

In the image above, notice how the price action within each box represents 30 minutes of trading. In any time-based chart, the 30-minute period for both instances of price action would be equal in terms of space.

As you can see in the tick chart above, neither boxes are horizontally equal to one another, and that’s because there were more trades in the period represented by the box on the left than in the right. In other words, there were more transactions made in the box on the left. But the time period in which the trading took place–exactly 30 minutes–is the same amount of time represented by the box on the right. The period on the right just had fewer trades. Hence, it appears narrower.

Tick Chart Trading Strategy

In a regular daily chart, patterns often emerge shedding light on larger-scale fundamental conditions. For example, take the Cup with Handle pattern as shown below.

On a daily scale, this pattern gives us some “meaningful” information:

1 – Price reaches a new high.

2 – Price pulls back as new buyers enter, preventing price from breaking below its recent low.

3 – Price retests last high but fails to breakout as buyers drop out or short sellers enter the market.

4 – Selling activity slows down as buyers overwhelm sellers (assume that volume is increasing).

5 – Price breaks out toward a new high.

If this happened on a tick chart, it would be hard to tell whether the strategies that formed this pattern on a “daily” chart would be the same on a tick level. In other words, the patterns are more likely to be random than meaningful or fundamentally reflective.

So you might not want to go about looking for patterns beyond those that reflect basic supply and demand on a micro scale. In short, it might better serve you to focus on four things: support, resistance, breakouts, and (micro) trends.

Take a look at the hypothetical tick chart below:

How might you have traded something like this?

Noticing resistance at 2949.50, you might have traded a breakout above that price level (placing a buy stop at that price). Noticing resistance again at 2950.25, you might have anticipated a bounce off former resistance (turned support). Perhaps you could have placed a buy limit at 2949.75 or a buy stop at 2950.25. The trend, however small, is up, so you might anticipate another swing upward.

In short, there’s plenty of information to identify support, resistance, breakouts, and trends (for directional bias). It might also help to view larger time frames to identify key price levels. For example, what if 2951.00 appeared as a strong resistance level on an hourly chart? If so, you might want to consider going short for a few ticks or points.

Since you are dealing with a minimal set of shapes when trading tick charts, it might be helpful to use a few indicators to complement your tick chart analysis–particularly those that measure volume (liquidity), momentum, and potential overbought/oversold levels. Here’s an article that discusses three indicators that you might want to consider using when analyzing and trading tick charts.

Remember, at this level of transaction, you are dealing with market noise. Another thing to bear in mind–a caveat, really–is that unless you have a fast platform with equally fast order routing speed, then you may encounter serious slippage. Even slippage of one tick can erode your strategy’s profit potential. And at times when the markets are less liquid, chances are good that your slippage may be more than just one tick.

The Bottom Line

For every unique advantage that a tick chart provides, it also comes with a caveat. Tick charts may provide clear analysis but only on the transactional level. Not every transaction provides useful information. Sometimes you’ll get signal but often times you’ll get noise .

You may be able to see the shape of support and resistance clearly without the bias of time. This can be helpful when identifying and trading breakouts. The caveat here is that often these shapes will happen on a microscale which can entail slippage for most retail traders.

Perhaps one of the biggest advantages of using tick charts is that not many traders use them, so the charting space may not be saturated with competing strategies. If you are able to bundle ticks in a way that provides meaningful information, then you would be approaching the futures market from a different angle, giving you a potentially novel edge in trading.

Futures Trading Platforms with Tick Charts

If you want to explore Tick Charts in more detail, please feel free to request a FREE demo of any of the following platforms at Optimus Futures:

R | Trader Pro

MultiCharts

Sierra Chart

Inside Edge

Bookmap

Jigsaw

Investor/RT

TradeStation

OEC Trader

Trade Navigator

CTS T4

Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade.

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