Chart Types
Four types of candle 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.
Volume: A new bar is created after a certain number of
contracts have been traded. For example, every 2000 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 either
the high/low of the bar and the opening price is 1 tick above/below
the previous bar.
Here is the same 1 hour segment in the market on 3 May 2004 from
09:30 to 10:30 EST for the ES contract showing what 3 of the
different charts look like for a 1 minute, 2000 volume and 233 tick
chart.
ES 1min candle chart from 09:30 to 10:30 EST on 3 May 2004
ES 2000V candle chart from 09:30 to 10:30 EST on 3 May 2004
ES 233T candle chart from 09:30 to 10:30 EST 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 a completely different characteristic when the
volume and number of trades drop. Consider the following similar
charts that show the market action overnight and up to 09:15 EST on
the same day as the charts above. The settings are the same except
for the time based chart which shows a new bar every 15
minutes.
ES 15min candle chart to 09:15 EST on 3 May 2004
ES 2000V candle chart to 09:15 EST on 3 May 2004
ES 233T candle chart to 09:15 EST 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 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 and 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. Let me know if you don't think that this is the case.
A tick chart creates a new bar ever 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. If 233 trades of 1 contract each are traded
sequentially then a new bar will be formed. If 233 trades of 200
contracts each are traded sequentially then a new bar will be
formed. In the first case we have 233 contracts being traded and in
the second case we have 46,600 contracts (233 * 200) being traded.
This example, although extreme and unlikely, is a possibility and
less exaggerated examples of it are obviously more likely than this
example. The volume chart address 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 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 read above 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. These will be discussed on subsequent pages.
At this point in time I do not have any examples of
range/momentum charts to show you.
Final Note
If you are using eSignal and wish to experiment with different
chart types then 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.
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