Three More Types of Bar Charts

This is the fourth in a series of articles starting with the October 2, 2006 article entitled "Trading With Charts".

This article talks about 3 types of charts that look like the OHLC charts that are commonly available except that the information represented by each bar is different and except that most chart providers do not yet provide them.

Tick Charts can be either a line or a bar chart. A “tick” in this context is one transaction, a buy-sell, in the instrument charted. When a tick chart displays a line connecting dots, each dot is supposed to represent just one single transaction.

When a tick chart displays bars, each bar in a tick chart represent a specific number of transactions (buy-sells) regardless of the time it took to complete those transactions. The bar’s top indicates the high price; the bar’s bottom the low price. Dashes on the bar are used to indicate the open and close price.

For example, you can set your tick charts to let each bar represent 500 transactions.

One problem with tick charts is the way some exchanges lump some transactions together and publish them as a single transaction. The result is that in a 500 tick chart, one bar might really be 710 transactions, for example, instead of exactly 500 transactions while the next bar in the same chart is actually 653 transactions.

So if your trading system involves making decisions based on the number of transactions, your decisions will be based on inaccurate information. The implication is that your decisions are inaccurate too.

Volume bar charts are similar to tick charts. The difference is that each bar in a volume bar chart represent a specific number of shares or contracts bought and sold. That’s regardless of the time it took to complete those transactions. The bar’s top indicates the high price; the bar’s bottom the low price. Dashes on the bar are used to indicate the open and close price.

For example, you can set your volume charts to let each bar represent 500 shares or contracts.

Another type of bar chart is one in which each bar represents a specific price range. You can set the range at, for example, $1.00. If you do, then the next bar does not begin to form until prices move outside the range of the current bar. And the next bar will include only prices within a $1.00 range between the high and the low price. That’s without regard to the time it takes for the next bar to start or the volume of transactions in each bar.

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Copyright 2006 Raymond T. Lee. All rights reserved.
Leisurely e-Mini Futures Trading
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