Price charts are a technical trader’s portal to the markets and a primary means of making trading decisions. Today’s market analysis platforms offer traders a variety of options for viewing price data on a chart, from chart style to interval. The style of the chart determines how price is displayed; for example, bar and candlestick charts. The chart interval dictates which data are used to construct the display. Here, we take a look at popular chart styles and intervals, including time, tick, volume and range bar charts.
While there are many different chart styles, the two most common ways to display prices are bar and candlestick charts. These two styles show the same information: The open, high, low and closing prices for a specified chart interval. Visually, however, bar and candlestick charts are quite different. On a bar chart (also called an OHLC chart), the high and low prices for each specified interval appear as a vertical line, and two, small horizontal lines that represent the bar’s opening and closing prices appear on either side, as shown in the left chart of “Two styles” (below).
Candlestick charts show the same open, high, low and closing prices with a different display. Here, the opening and closing prices form the body of the candlestick, and the high and low prices for the interval are represented by the wicks — thin lines that appear above and below the body, as shown in the right chart in “Two styles.” The body of the candlestick appears black if the close is lower than the open and white if the close is higher than the open. It’s common for traders to substitute colors for black and white. A green body, for example, means that price closed above its open (showing strength), while a red body often indicates that price closed below the open (showing weakness).
Some traders use candlestick charts to spot price patterns that may indicate a reversal or a weakening of the trend. Patterns can be formed within the same candlestick by comparing the size of the body to the wick, or across several adjacent candlesticks. A bullish engulfing pattern, for example, is a reversal pattern that occurs when the body of an up-candle bar completely covers, or engulfs, the body of the prior bar, signaling the end of a downtrend, as shown in “Time to turn” (below). Candlestick charting often works best when combined with other technical tools or indicators for confirmation.
Most investors and traders are accustomed to viewing price charts that are based on time, such as daily, 60-minute or five-minute intraday intervals. With a time-based chart, one bar — be it a candlestick or OHLC bar — prints at the end of each specified time interval, regardless of the amount of trading activity that has occurred. On a five-minute chart, for example, a bar will print at 9:35, 9:40, 9:45, 9:50 and so forth until the end of the trading session.
There always will be an equal number of bars per trading session when the same time interval is applied. Time-based charts can be as small as a few seconds to as large as weekly, monthly or yearly intervals.
A trader’s style often determines the size of the chart interval. Longer-term traders, such as swing and position traders, might use hourly, daily or even weekly charts. In contrast, short-term traders may prefer 30-second or one-minute charts to see the details of price action.
While time-based charts are perhaps the most widely used, activity-based price charts offer traders a different view of the markets, and as more bars print within a set amount of time, these charts can indicate an increase in volatility. Tick, volume and range-bar charts are examples of activity-based charts.
These charts print a new bar at the close of a specified activity interval, regardless of how much time has elapsed. “Activity driven” (below) shows a 15-minute chart of the E-mini S&P 500 (ES). The overlays in the chart show one 15-minute bar “exploded” to illustrate the tick (on the left) and range bar (on the right) activity that took place during the same time. Activity-based charts can paint a more accurate picture of market action by showing the effect that the number of transactions or volume has on price.
Here’s a closer look at various types of activity-based charts.
With a tick chart, each bar represents the price activity that took place during a specified number of transactions. A 100-tick chart, for example, prints a new bar each time 100 transactions have filled. Each transaction is counted just once, regardless of the size.
Because tick charts are based on a certain number of transactions per bar, they help traders identify current market information. Acting much like the display on a gas pump that allows you to judge the flow of gas into your car by the speed at which price scrolls by, tick charts give traders instantaneous information about the speed of the market. The more time that a trader spends in a particular market using tick charts, the more the trader will be used to that market’s tendencies. Periods of increased activity — and potential trading opportunities — then instantly can be recognized and acted upon.
The interval of tick charts often is derived from Fibonacci numbers, a numerical series discovered by Leonardo Fibonacci in which each number is the sum of the previous two numbers. While traders can specify any number of transactions, popular Fibonacci-based intervals include 144-, 233-, 610- and 987-tick charts. It is common for traders to use different tick intervals across multiple charts of the same trading symbol. For example, a trader might make trades off of a 144-tick chart after finding confirmation on a 987-tick chart.
Volume charts record the prices for a specified number of contracts or shares traded. In a 1,000-volume chart, for example, a new bar prints every time 1,000 contracts (for futures/commodities markets) or shares (stocks and exchange-traded funds) have traded, regardless of the time that has elapsed. One bar might represent a single large transaction or numerous small trades and, similar to tick charts, traders can get an idea of how rapidly a market is moving simply by noting how many (and how quickly) bars are printing.
“Volume view” (below) shows a 5,000-volume chart of the E-mini S&P 500 contract. To illustrate how volume and activity can differ throughout the trading session, the first hour and lunch hour are highlighted in yellow. Note how there is significantly more trading activity during the open.
Volume intervals are typically scaled to an individual symbol to reflect normal market activity for that symbol. A symbol that trades under large volume, such as the E-mini S&P 500, would require a larger interval to provide relevant charting analysis.
Popular intervals include 500, 1,000, 2,000 and 5,000 volume charts (again, depending on the symbol), though virtually any number could be assigned. As with tick-based charts, Fibonacci intervals, such as 987, 1597 and 2584, are popular choices for volume charts.
Range bar charts
Range bar charts are the relative newcomers to the charting world, and are composed of bars that are based only on price activity, thereby eliminating time, number of transactions and volume from the equation. Each bar represents a specified price movement, such as 10 cents or 50 cents, and once price has moved the specified amount, one bar will close and a new will open. The three governing rules of range bars are:
Each range bar has a high/low range that equals the specified range;
Each range bar opens outside the high/low range of the previous bar; and
Each range bar closes at either its high or low.
Unlike time-based intervals where an equal number of bars print each trading session, any number of range bars can appear during a session depending on the volatility of the given market.
Range bars can help traders view price in a consolidated manner. A lot of the noise that occurs when prices bounce back and forth in a narrow range can be reduced to one or two bars, helping traders distinguish what is happening to price. Because much of the noise is eliminated, range-bar charts make especially ideal charts on which to draw trendlines to point out areas of support and resistance, as shown in “Home on the range” (below).
Determining the best chart interval requires practice and screen time. The chart should match the trading style and the time frame in which the trader operates. It is important to remember that time and activity chart settings are relative to the market being traded, so no single setting is appropriate across all markets or trading styles.
Jean Folger is the co-founder of, and system researcher with, PowerZone Trading, LLC. Jean can be reached at www.powerzonetrading.com.