E-mini trading charts are a visual representation of the data created by the price action of the market. Traders have a number of choices as to how that data is represented on a trading chart. In my opinion, most traders seem to opt for time-based charting methods. There are, however, other ways to display market data which may be a better option for some traders. In this article we will discuss some of the advantages of using tick charts (volume based charts), which are not based on time but on a traded selected number of trades. For example, a 500 tick chart draws a bar for every 500 trades, regardless of the amount of time it takes to accrue those 500 trades. In a heavily traded market, a 500 tick chart may display bars at a brisk pace; and in a slow market a 500 tick chart may only draw one bar every 10 minutes. The point is a simple one; volume based charts have no correlation to the amount of time it takes to accrue 500 trades.
There are several reasons that traders prefer volume based charts and I have chosen 4 that I think are the most important. They are, in no particular order:
1. Tick charts allow for quicker recognition of breakouts and breakdowns. As I mentioned in the introduction, these charts are concerned only with the number of trades the trader chooses to examine. Breakouts and breakdowns often start suddenly and with substantial volume. Since most e-mini traders take their trades at the close of each bar, a volume based chart will allow for quicker recognition of a breakout or breakdown, especially when compared with time-based charts. At the conclusion of a 3 minute bar, a breakout or breakdown may be well underway; but on a tick chart you will get a more immediate signal as the volume increases. Since I am very fond of trading breakouts and breakdowns, or fading failed breakouts and breakdowns, volume based charts are a very valuable tool for this type of trading.
2. As a former institutional trader, I am predisposed to attempt to follow large traders. One of the axioms and my e-mini trading style is: large traders control the market. Having said that, tick charts can provide a smaller trader with a unique insight into when large traders are active because of the larger volume involved in institutional trading. The corollary argument is also true; when smaller e-mini traders are the primary players in the market, a tick chart will represent that sluggish trading action with accuracy. I want to trade with the large traders, and avoid trading with the smaller retail traders.
3. Since tick charts compress slow trading periods (that is, periods of low volume), it helps e-mini traders avoid trading during periods of consolidation. Often times, consolidation periods are referred to as range trading or channel trading. Generally speaking, channel trading is typified by low-volume and restricted trading range. On a time-based chart this action snakes along and can indicate false setups. On a tick chart, this low-volume trading is represented by far fewer bars and makes channel trading more easily identified. There are few instances that I would want to initiate a trade while the price action is in a channel formation.
4. Tick charts give me an excellent idea of the velocity of the market. As an e-mini scalp trader, I am extremely interested in market momentum. While there are few specific indicators to indicate the velocity of the market, the speed at which the market is accelerating and decelerating is of prime importance to a momentum trader. I want to trade during periods of accelerating market action, and avoid trading during periods of decelerating market price action. Volume based charts give me an excellent picture of how fast the market is accelerating or decelerating.
In summary, we have identified 4 advantages of using tick charts.
They allow for quick identification of breakouts and breakdowns.
These charts allow me to identify when large traders are active and when small traders are active.
These charts compress channel trading periods for easy identification.
These charts allow for quick recognition of momentum and help identify ongoing momentum.
There is a time and place for volume based charts in your trading methodology and I recommend trying them because they are an excellent tool in your trading arsenal.