Price Bars

T

TriPack

I've been thinking a lot about price bars of late. In particular the question, "what are the most important or essential components of visual trading" and "do price bars show what is important"

In particular I've been thinking about intraday time charts (minute charts): 1 min, 5 min 30min etc., and tick charts: 1 tick, 50 tick, 233 tick etc. Do minute charts and tick charts really show what is important?
 
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Do minute charts and tick charts really show what is important?
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I guess to answer this you have to figure out what is important about price charts. And the answer for me is: trends. The non important part of price charts for me are congestion or nontrend.

Ok this sounds pretty basic and common sense but what are the implications?

If trends are really more important, then the trend bars on a chart are more important than the congestion bars on a chart. Looking at minute based charts, typically you will have several really big bars on a given day (trend bars) that move price from one level to another, and a lot of very small bars (congestion bars) that overlap each other's ranges.

But do minute charts emphasize the trend bars or do they deemphasize the trend bars?
 
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But do minute charts emphasize the trend bars or do they deemphasize the trend bars?
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Ok look at a minute-based chart. There are far fewer trend (big) bars than congestion (small) bars, even though the trend bars cover more area than the congestion bars. So the answer to the question for me is, minute based charts actually deemphasize trends and tend to over emphasize congestion. Think about the ramifications of that for a minute. If you think in terms of your favorite indicator (Stoch, MACD, CCI, RSI, MA, etc.) you may realize as I have, that these indicators cannot work optimally to capture trends, when applied on a chart that by its very nature deemphasizes trends. In all seriousness, this realization blew my mind, and led to an "AHA" type of experience.
 
Now think about tick-based charts for a bit. Tick charts aren't time bound, but rather they are price quote bound. Tick charts increment whenever a new price quote is sent by your data vendor. This could happen on a price change, or could happen whenever a trade takes place. This transmission could also be summarized (as with quotes that update on a timed interval) or could be summarized only when the market is moving too fast for the quote vendor to keep up.

So we have tick charts updating as quotes are received - incrementing by one tick and when the # of ticks per bar is reached, a new bar is formed.

Now ticks by their very nature are tied to activity. It used to be in the futures market before electronic trading (and still is for most pit-traded contracts) that realtime volume was not reported. So as a proxy ticks were used to represent activity or volume. Some astute individuals have estimated that those ticks were about 70% accurate in representing the true volume picture, and thus was "good enough" to trade off from. That sounds about right to me but the point isn't essential.

Ok we have tick bars incrementing when new ticks are received. As a general rule, more volume (ticks) tend to occur during trend phases, but the relationship isn't perfect and so even though fewer tick bars tend to form when there is less activity, I've come to the conclusion that ticks truly don't equate to trend activity any more than minutes equate to trend activity.

So although tick charts are better at showing less bars during non-trending times, they still keep incrementing bars as new ticks are received, regardless of how trendy that particular tick happens to be. So I've come to the conclusion that just as minute based charts are not a very good representation of trends, so too tick based charts are also not a very good representation of trends. So what is a good representation of a trend?
 
Just for clarification, a key presumption is that more bars of a certain kind indicate that those bars are being emphasized more, and vice versa, the less bars of a certain kind (trending / non-trending) that are present in a chart, the less emphasis that chart puts on those types of bars.

So if you have a chart that puts very high emphasis on trend bars, and you plot a moving average (trend indicator) on it, you should have a very efficient way of viewing that trend because the unimportant bars are few enough that they don't significantly affect the result of that indicator.
 
So what is a good representation of a trend?
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Everyone has their own idea about what constitutes a trend. I'm open to new ideas on the subject.

But let's take a look at a relatively obscure form of charting that used to be popular among floor traders back when charts were drawn by hand: point and figure.

I really don't like Xs and Os, or the way this charting method is presented in the charting programs available. But the concept I think is better than minute bars and tick bars as far as what represents a trend.

With point and figure charting you pick a box size and a reversal amount. So by definition a move of the reversal amount * box size is the equivalent of a trend change.

Now there are drawbacks here as well but the point of bringing up this type of charting is just to emphasize what is good that may be lost in minute and bar charts: trends are clearly defined by the rules of how the chart is constructed. Now the core definition of a trend may be faulty, but at least it makes an attempt.

Pro: Point and figure charts reduce a lot of the miniscule noise that really can't represent a trend. On the other hand this reduction of noise also turns trends into single columns either up or down (fewer trend bars), and also makes decisions late because the reversal amount has to be reached in order to draw an opposing X or O to the current trend.

So what are the key concepts that we can learn from all of this?
 
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So what are the key concepts that we can learn from all of this?
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I'm so glad you asked. :p

For trends to be emphasized in the chart, there should be more trend bars than non-trend bars. This can be achieved in a number of ways, for instance single trend bars could be split up to make more trend bars, but this begs the question: how do you know it is a trend bar until it has made its move? Another way to emphasize trends on the chart is listed below:

Filtering trends by omitting charting moves under a certain amount IMHO is a keeper idea with regards to defining what is a trend.

So this is what I've come up with. If you have other thoughts please share them. I'll add comments as I recall more thoughts on this subject.
 
Anyone have any comments on Price bars, and any of the observations / conclusions I made (good bad or ugly)? I know it's a long read but I think it's a stimulating subject to explore.
 
A year or two after I started trading, I came up with an indicator that I referred to as "Move Range". This indicator essentially just kept track of the major intraday moves on a particular chart (swinghigh to swinglow etc.) It was a great step forward in my trading because it finally allowed me to see the distances that each of the moves traveled, and how many of each type of move occurred during the day. It also did something else: it focused my attention in on the larger moves (trend moves) rather than the smaller moves.

I can see that this indicator put me on a path that led me to the realization that moves less than a certain size should merely be filtered out and ignored, while moves over a certain size should used as those are the trending bars under this definition. What is the minimum size? I don't think there is a magic number, it varies by the bar length of the chart you are viewing. The bigger the average bar, the larger the minimum range needs to be to display movement on the chart in a visually logical way.
 
Read part 3 regarding steps 1,2,3 and 4. It describes in detail what you have noticed

http://www.tedtick.com/steid.htm



Why not have a charting package that creates bars/candles based on actual contracts traded? 1000, 5000, 10,000 (you could set it according to market speed)

Why not have your volume histogram for each bar/candle show how many of the 1000, 5000 or 10,000 contracts traded at the Bid and Ask and print the ratio 1:1.5 - 1:2 - 1:1 - 1.7:1 (Look for the ratio change at your favorite Sup/Res levels


If you are a very short term trader you can even check out
http://www.tradegraph.com

Trade on and be excellent to each other
They
 
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