In this discussion of chart types, we will be comparing time-, tick- and volume-based charts.

To my knowledge, there are 4 different ways to build a candle in a Japanese candle chart. You can build each candle (or bar as some call it) based on time, ticks, volume or range.

Time: After a period of time, you take the open, high, low and close during that period and plot that as a bar. The period of time can be anything from a few seconds to months, years or decades.

Ticks: A tick is a single trade, irrespective of size. A tick chart builds each bar based on a certain number of ticks per bar. A 233-tick chart will create a new bar after every 233 trades have gone through, regardless of how long that takes.

Volume: A volume-based candle chart creates a new bar after a certain number of contracts have been traded. For example, every 2,000 contracts, a new bar is shown.

Range: A new bar is created when the price trades outside the defined range for each bar. These charts are also called momentum charts. By definition, the closing price is the high or low of the bar, and the opening price is 1 tick above or below the previous bar.

Here is the same 1-hour segment in the market on 3 May 2004 from 09:30 to 10:30 a.m. ET for the ES contract, showing how 3 charts (a 1-minute, 2000 volume and 233) compare in appearance.

ES 1-Minute Candle Chart from 09:30 to 10:30 a.m. ET on 3 May 2004

ES 2000V Candle Chart from 09:30 to 10:30 a.m. ET on 3 May 2004

ES 233T Candle Chart from 09:30 to 10:30 a.m. ET on 3 May 2004

As you can see, the 3 charts exhibit very similar patterns under these conditions because the average volume and number of trades can be roughly equated to a time period during high volume periods.

The charts take on completely different characteristics, however, when the volume and number of trades drop. Consider the following similar charts that show the market action overnight and up to 09:15 a.m. ET on the same day as the previous charts. The settings are the same except that the time-based chart shows a new bar every 15 minutes.

ES 15-Minute Candle Chart Overnight up to 09:15 a.m. ET on 3 May 2004

ES 2000V Candle Chart Overnight up to 09:15 a.m. ET on 3 May 2004

ES 233T Candle Chart Overnight up to 09:15 a.m. ET on 3 May 2004

Moving averages and other derived indicators from a price-based chart usually use the closing price of a candle. Indicators are usually based on a number of bars, and this will affect the signal given by an indicator, depending on the chart type (and, hence, number of bars).

It is my opinion that the tick chart serves little purpose and is dangerous. If you want to use a size-based bar chart, you should use a volume-based chart instead. Note that I say that this is my opinion.

A tick chart creates a new bar every X number of ticks. Let's assume that X in this case is the popular value of 233 used in a lot of tick charts. When 233 trades of 1 contract each are traded sequentially, a new bar is formed. Also, when 233 trades of 200 contracts each are traded sequentially, a new bar will be formed.

In the first case, we have 233 contracts being traded, and, in the second, we have 46,600 contracts (233 times 200) being traded. This example, although extreme and unlikely, is a possibility and less exaggerated examples like this are obviously more likely to occur. The volume chart addresses this issue and rolls onto a new bar every X number of contracts traded.

It is (again, this is my opinion) volume that pushes the market and not the number of trades, and that is why I feel that the tick chart should be abandoned in favor of the volume chart if it is size-based bars you are looking for.

Subsequent to writing what you've previously read, I've been introduced to Momentum or Range bars. These do not (in my opinion) strictly fall under the candle bar category because the closing price of a momentum bar is always at the high or low of the bar, so you only have 3 different values in the bar and not 4 as in a traditional candle bar.

If you are using eSignal and wish to experiment with different chart types, here is how you do it:

In the Interval box on an advanced chart, enter:
233T to create a 233 tick chart
1 to create a 1-minute chart
2000V to create a 2000 volume chart
150S to create a 2.5-minute chart

To provide a more uniform comparison of the 3 main chart types that I've discussed previously, I have taken 1 day and time period and compared time, tick and volume charts across this time period.

What I am looking at here is the S&P E-Mini contract (symbol: ES) on 10 September 2004 from 09:30 to 16:15 ET. This timeframe is also known as Regular Trading Hours (RTH).

Here is the 5-minute chart for this period with volume:

From 09:30 to 16:15 ET, we have 405 minutes, which means that the previous chart shows 81 bars of data (405 divided by 5).

During this period, we had 439,068 contracts traded in 67,090 trades. (As an aside and just for your interest, that's an average of 6.5 contracts per trade [tick]). Please remember that a tick chart counts each trade (irrespective of number of contracts traded) as one tick, and, so, a trade in this context is the same as a tick. The word "tick" takes on a number of different meanings depending on the context in the trading environment, so don't be confused by its use here.

Given that we have 81 bars in the time-based chart, I decided to replicate the 81 bars in both a volume- and a tick-based chart to see how the shape or pattern of the chart might change if it was based on a comparable interval. Here, I am assuming that comparable means the same number of bars over a given time period. Of course, you may (and anyone can) come up with many different definitions for "comparable".

So, with a total volume of 439,068 and a desire to produce 81 bars, we have a volume chart based on 5,420 contracts per bar (439,068 / 81). That also means that we need to use a tick chart of 828 ticks per bar (67,090 / 81).

Here are the two charts:

5,420V Chart

828T Chart

To perform another comparison of the data and what we are trying to isolate, I decided to turn the data on its side and compare the ticks, time and volume that occurred at each price level. Here is that chart:

Take a careful look at what I've produced. On the x-axis, we have percent in order to normalize comparison of the 3. Note how, at approximately the 1118.50-to-11120.00 price range (which happened mainly at lunchtime), the percentage of time spent here is high, but, more importantly, there is a higher percentage of trades (ticks) than there is volume at each price.

What does this tell us? Simply that the small players are trading with small lots. Of course, it could also be large players putting through their orders in small lots as well in order to (1) disguise themselves as small players and / or (2) not move the market too much while building up their positions.

When we move up to the higher prices that occur later in the day, we can see that there is more volume moving the price showing larger players moving the markets as opposed to the small lot players we saw during the lunch period. We assume here that the large players are the professionals and hedge funds and are also more successful than the small players.

So what does this tell us? If that (just stated) assumption is true, it tells us that, when we see a market with lots of ticks in small lot contracts flowing through the market, we are seeing amateurs at work. Conversely, when the big players are active, we're seeing professionals at work. Which price action is more important to watch? The price action generated by professionals or by amateurs?

This may look as though I've wandered somewhat off topic here but showing the Trades, Time and Volume at Price in this fashion, I believe, is an objective way of combining the 3 aspects into one pictorial representation that can prove to be an accurate comparison tool.

But what are we trying to achieve with all of this? In my opinion, we are trying to ascertain a bias for using one chart type over another to give us an advantage in the market that other traders don't have.

The tick- and volume-based charts solve the "problem" we experience in a time-based chart when nothing is happening in the market, but the chart is still printing prices. The indicators we derive off those prices, in turn, are not as informative because they are based on a sideways, non-active market, which often happens during a lunchtime period.

So, to solve the "time problem" (if, indeed, you consider a time-based chart a problem), we can choose a tick or volume chart. Which will it be? Well, as you can see from my previous discussion, the small players are still active during the quiet periods of the day and are generating plenty of ticks during those quiet periods. This leads me to suspect that a tick chart would, therefore, not be as useful as a volume chart. However, based on the 81 bars during RTH, I see very similar signals between the tick and volume charts, and this does not point me to a preference of one over the other.

Here, I present the same 3 charts except that, this time, I have added a 20 SMA on all the charts and a white arrow showing the final cross up buy signal from the price crossing (from under) the 20 SMA and also a green arrow showing a low price dip just before 11:00 a.m. ET.

Notice that approximately 50% of the x-axis is taken up by the points between the green and white arrows on the time-based chart compared to only approximately 25% of the x-axis on the tick- and volume-based charts. This is because very few ticks and contracts (volume) flowed through the market during this time period and, as such, the time-based chart appears to distort the true flow of money.

It's no secret that tick charts worry me. This is because they are open to manipulation. Why? If a big trader wanted to buy 200 contracts at market, he could do it as a single 200 contract trade, which would show as 1 tick (assuming that there are at least 200 or more contracts currently on offer).

Or, if he had a sophisticated trading platform (which a large trader who wanted to manipulate the markets would have), he could tell his trading platform to release 200 by 1 contract buy orders, which would generate 200 ticks. On a volume chart, this would make no difference but on a tick chart it would.

Say you were looking at a 50T chart. The first method of executing the trade would contribute 1/50 or 2% of a bar on a 50T chart; whereas, the second method would be the equivalent of generating 4 bars on that chart.

So, using the data from this day, let's have a look at how many bars are generated during a given time period using tick charts and volume charts. We have already isolated the times and prices at which larger lot sizes are flowing through the markets, so I have done a calculation using a high tick period and a high volume period to show you the difference.

To get a higher resolution and a greater number of bars I have quadrupled the number of bars in each of the volume and tick charts. This means using a 207T chart and a 1355V chart. These values are one quarter of what you have been looking at in the previous charts.

If we look at the time period between 10:56:38 and 14:05:04 ET, we have a high tick period versus volume period. I have labeled this "P1." I have also isolated the time period between 15:20:23 and 15:24:52 ET as a high-volume-versus-tick period and labeled this "P2" in the subsequent table.

Notice that the time period is more than 2 hours in P1 and less than 5 minutes in P2. Time doesn't matter on tick and volume charts. That's the whole point: We're removing the time element from these charts. However, I need to use time to isolate the two periods for comparison because, when we trade, we actually trade at a point in time, and we cannot avoid that in the real world where we have a time continuum.

What I'm demonstrating with the previous table is that, when the small players are active during P1, they generate more bars on the tick-based charts. This will obviously generate a different indicator value for a tick-based chart during this period. If you were looking at a 50-, 100- or 200-bar moving average, during the same time period, the tick-based chart would be using more bars during P1 to calculate that MA than the volume-based chart.

When we move to P2, that situation reverses. During this period, there are more large lot contracts flowing through the market, which causes more bars to be generated on the volume-based chart. Likewise, an MA on the volume-based chart will have more bars to calculate its value than on the tick-based chart.

If you use a tick-based chart, you can show the volume as a separate panel / indicator, and that will let you know if the bars are being generated based on small or large lots being executed. On a volume chart, there is obviously no point in showing the volume per bar because it will always be the same.

The two important items I would like you to take away from this article are these:

1. Any indicator that you use that is price based (derived) and is also based on a look-back period will have its value influenced by the type of chart you use. You should be aware of that and how different periods of the day or market environments might change those readings.
2. Use what works for you. If you have a strategy based on a tick chart that makes you money, then stick to it. If your tick chart-based strategy fails under certain market conditions, you may be able to improve its performance using some of what I've presented here.

*Reprinted (and modified) with permission from Guy Ellis