Tick Chart Versus One-Minute Chart for Day Trading
The Pros and Cons of Tick and Time-Based Charts
Traders have a number of options when it comes to which chart types they use. Candlesticks and bar charts are the most popular. They provide the same information, except candlesticks 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 both have pros and cons.
One-Minute or Time-Based Chart
If you use a one-minute chart (or two-minute or five-minute) 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.
This creates a uniform x-axis on the price chart, because all price bars are evenly spaced over time. 60 price bars are produced each hour, assuming at least one transaction took place. One-minute charts are popular among day traders, but aren't the only option.
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 every 512 transactions. Customize tick charts to the number of transactions you want, for example 5 ticks or 1546 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 lots of volatility and action, so tick bars occur very quickly. Five ticks bars may form in the first minute alone. During the lunch hour, though, when the number of transaction decreases, it may take five minutes before a single tick bar is created.
Comparing a One-Minute Chart to a Tick Chart
When there's lots of activity a tick chart shows more information (more price waves, consolidations and smaller scale price moves) than a one-minute chart. For example, when a market opens several ticks bars within the first minute or two may show multiple price swings which 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 get into moves sooner, take more trades, and spot potential reversals before they occur on the one-minute chart.
When there are few transactions going through, a one-minute chart appears to show more information. For example, assume you are debating using a 90 tick chart or a one-minute chart. Assume 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. The one-minute charts shows 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.
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 in that minute. This may create the illusion of activity, even though there may actually be little volume in the stock, futures contract or forex pair.
The chart example shows a one-minute chart (top) compared to a 1000 tick chart (bottom) of the SPDR S&P 500 (SPY). Both charts start and end at 9 am and 4:02 pm, respectively. The one-minute chart provides more price bars before 9:30 AM, 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.