A tick chart is a predetermined trade value between sellers and buyers. The tick chart contains bars that represent a particular transaction of trade. In simpler words, tick charts represent trade transactions per bar.
An example of this is that if you have a tick chart where every bar represents 200 trade transactions, a new bar will appear on the chart once the transactions are complete. Those 200 trade transactions can be a single contract traded 200 times between sellers and buyers, or it could be thousands of contracted trades between traders.
The example mentioned above is a common confusion for those involved in the Forex market, and we will try to clarify them. In this article, we will touch upon different aspects of tick charts and their advantages.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
Different Ways of Trading Forex
There are three ways to trade Forex:
- Spot Market: This is the primary market for trading forex; here, pairings of currencies are swapped, and the exchange rate is determined based on demand and supply.
- Forward Market: Instead of initiating a trade, traders can have a binding contract with another trader in the forward market. The two parties will also decide the exchange rate, amount of currency, and a future date.
- Futures Market: Like the forward market, traders can opt for a contract to sell or buy a fixed amount of the currency at a specific exchange rate in the futures market.
Commonly Used Tick Charts
When it comes to tick charts, the element of time does not exist. You can choose any of the following charts:
- M1
- M5
- M30
- H1
- H4
- D1
- W1
Tick charts also offer you the option of choosing your settings. For example, some traders prefer charts with 50, 100, 200, 500, or 1000 ticks, while others prefer Fibonacci numbers and go for 21, 34, 55, 89, 144, or 233 ticks. A usually successful approach is to pick the numbers on the tick chart by comparing them to a time-based chart.
For example, if you plan on trading in five-minute charts, pick a tick chart similar to the five-minute chart. However, if you plan to scalp, the best choice will be charted with 34 or 50 ticks. For day trading, charts with 1000 and 2000 ticks are mostly used.
No chart is perfect; it all depends on the traders and the strategies to employ. Sometimes traders have to test different chart settings and pick the setting they feel most comfortable with.
Advantages of Tick Charts
Lower Market Noise
Tick charts are based on trade transactions, and new bars are plotted only when enough trades are made, so there is a substantial decrease in market noise. However, the market noise acts as a distraction for most traders, even the seasoned ones, so it becomes difficult to decide.
The market noise is mostly represented by candles that are considered useless and have no real value. The mistake traders make is that they use candles as indicators, focusing on unimportant market elements. The main advantage of a tick chart is that it compresses periods of low activity.
On charts based on time, you will see thirty to forty candles, while the chart will only have ten to fifteen relevant candles.
Better Volatility Analysis
The tick chart operates on trades and traders, and they are constantly adjusting to the market conditions. When the trading activity is high in the market, more bars are plotted on the tick charts. This is a sign that market volatility has risen.
When the trading activity in the market is low, usually during the lunch hour, the volatility falls, and fewer bars appear on the tick charts. Thus, tick charts measure volatility more accurately than time-based charts and do not show unnecessary candles.
Swings are clearer
As we have already discussed, tick charts do not represent unnecessary candles like time-based charts, which makes it easier for traders to identify swings. During periods of increased volatility in the market, time-based charts show a long candle, whereas tick charts showcase several small candles.
This is why tick charts give more information to traders regarding swings. For example, a tick chart showcases more price fluctuations when market volatility rises, which helps trader’s identity resistance and support levels.
Better Breakout Visualization
Tick charts help traders identify breakouts better than other charts, and traders can quickly open a position at a good price level. For example, suppose that Trader A uses the five-minute chart and is waiting for the right opportunity to trade an upside breakout. Eventually, the breakout occurs, but the trader waits for the price to retrace to its resistance level.
The example mentioned above is a conservative method of trading breakouts, and traders wait until the pullback arrives. However, the pullback rarely comes, and the market keeps on rising; and even though the trader rightly predicted a breakout and spent a lot of time setting everything up, he still went away empty-handed.
In another example, Trader B observed the same setup, but he used a different approach; he used a chart with 200 ticks while assessing the market conditions. Again, he saw the breakout and grabbed it once the price retraced to its former resistant level. Again, the tick chart showed the trader the price movement, and he profited from it.
This change in the approach made the difference, and trading opportunity was not wasted.
More Accurate Signals from Technical Indicators
Tick charts are more accurate at giving indicators to traders. This happens because of the lower market noise, so the signals generated by the indicators have more relevance. When indicators on a time-based chart are not as accurate as usual, tick charts offer better signals to traders during high market volatility.
Tick Charts Tactics
Tick charts give you a much deeper market analysis than other types of charts and also have the volume displayed. Tick charts are less complicated than other charts; they are easy to use and effectively measure the strength of a trend and market-related momentum.
Tick charts are especially useful in the short term and are often used for day-trading and scalping. Although tick charts give accurate information about swings, most traders rely on swing data provided by time-based charts.
However, tick charts come with limitations, and though they give day traders an advantage, they are expensive, as brokers charge a handsome fee. The tick charts are also not 100 % accurate, and if you ever compare tick charts and different feeds of data, you may spot a few differences.
Some data feeds contain few ticks and are full of errors. This can have long-lasting effects on the trader and his strategy. Therefore, even though tick charts are considered superior to charts that rely on time, it is best to use a combination of both charts. The combination will give you a vivid insight into the market and reveal several hidden elements.
A common strategy that some traders apply is to identify resistance, trends, and support levels on time-based charts, and at the same time, identify entries in the tick chart. This helps traders reduce the level of noise in the market and determine market volatility.
What Moves the Forex Market?
Like other marketplaces, the price of the currencies is determined by their supply and demand. However, other factors in the forex market need to be considered. For example, sometimes, demand for a certain currency can be influenced by the political climate of the country, economic growth, and interest rates.
The Forex market is open 24 hours and five days a week (Monday to Friday), which allows the traders to be flexible and react to changes abruptly. However, since currency trading is based on speculations, traders need to remain sharp.
Forex Day Trading
Forex day trading is a trading strategy for the short-term, and its main purpose is to buy and sell currency pairings on the same trading day. Usually, Forex traders place numerous trades a day, and by the end of the day, close them out and rarely hold positions overnight.
The price of currency pairings fluctuates, and this provides opportunities for day traders, as they are constantly looking for volatile pairings and have high liquidity. Forex day trading can generate results abruptly and is a quick way of seeing returns on investment.
The day trading is for those traders that have time to analyze trading information throughout the day. However, day trading also requires reactions to short-term changes and fluctuations in the prices of currency pairings. Therefore, traders will need to be disciplined and knowledgeable.
Strategies for Day Trading
Traders must be aware of the crucial day trading strategies, and they involve technical and fundamental analysis. For example, the information will help traders determine when to sell or buy currency pairings. Sometimes, traders will need different strategies, as the conditions of the market can change instantly.
Forex News Trading
Traders need to stay up-to-date with the latest news to be well aware of the market conditions. This crucial step will help traders reduce risks and enable them to plan.
Traders should also set their targets and goals according to the daily news. Other factors such as economic indicators and interest rates can also influence the price of the currencies.
Trend Trading
Another important trading method is trend trading, and it involves studying long-term data to determine trends. Once a trend has been determined, traders will study charts with a smaller timeframe for trends moving in the right direction.
Momentum Trading
Momentum trading is a popular Forex day trading strategy, and traders that incorporate this strategy are looking for strong price movements paired with a high trading volume. Momentum trading requires traders to be patient and wait for the best possible opportunity.
The Risks of Forex Trading
Forex traders require leverage, and traders will also use margin, so there are risks involved. Currency prices fluctuate but not by a huge margin, so traders often need leverage to execute a trade. If the trader makes a winning bet, the leverage can help maximize the profits.
However, the leverage can also increase the losses. If the value of a specific currency falls significantly, traders that rely on leverage open themselves up to margin calls, which can force them to sell off their securities. Other than losses, transaction costs can also reduce the profit.
To become a successful Forex trader, you need to be skilled and extremely sharp, as there are many obstacles, and the risk of fraud and misinformation is high.
Liquidity and Volatility in the Forex Market
Volatility depends on several factors, and liquidity is one of those factors. In other words, volatility is a broad concept, and in the Forex market, a currency’s volatility depends on what the sellers and buyers offer in exchange.
On the other hand, liquidity is considered a driver, as it keeps a difference between the asking and the bidding price. However, its liquidity cannot bring down the volatility of a currency, but a lack of liquidity will decrease the volatility in the market.
How to Choose the Best Forex Trading Strategy?
There isn’t a permanent winning formula; there are several key factors that need to be considered. Some strategies will do wonders for traders, while others won’t. Traders should be comfortable with the strategies they design, and they should be sustainable.
Before designing a strategy, traders should keep in mind their goals, and the strategy should fit the following criteria:
- Required time and resources
- Trading opportunities
- Distance to target
Forex Trading Frequently Asked Questions (FAQ)
Who owns Forex, and where is it located?
Forex does not have a particular owner; it is an interbank market, which means transactions occur between a seller and a buyer. Therefore, as long as the current banking system exists, Forex will exist as a specific government or country that does not run it.
Working Hours of Forex?
Forex opens at 22:00 GMT on Sunday (Australian trading session opens) and closes on Friday 22:00 GMT (US trading session closes)
How Much Money is Needed to Start Forex?
Some traders start trading with just a dollar; however, the starting amount varies from 100 to 100,000 dollars.
Best Strategy for Forex?
No one strategy is better than the other one; traders must develop new strategies all the time. Some Forex strategies are only beneficial in the short term.
Can I Lose more than What I Invest in Forex?
Not really; the broker will not let the trader face huge losses and will not allow the loss to be greater than the amount in the trading account.
Conclusion
In this article, we have had a thorough discussion on tick charts and have covered their different aspects such as:
- What are tick charts?
- How to read them?
- Tick chart tactics?
- Advantages of Tick Chart
We have also briefly touched upon the few drawbacks that tick charts have and have advised traders to be careful. Every tool has pros and cons; for some tools, the cons outweigh the pros and vice versa. As a result, traders need to be careful and need to learn to look between the lines.
More often than not, traders are busy running after unnecessary elements of the market such as candles; they need to revise their strategy, remodel their approach, and learn to take calculated risks. Towards the end, we have brushed upon several key components of the Forex market that every trader should be aware of.