Forex Tick Charts and Why You Shouldn’t Use Them
If you have been trading Forex for a while, you may have come across tick charts.
On the Internet, such charts are usually accompanied by eloquent explanations of why they are so much better than traditional candlestick charts.
But it’s not. At least for spot traders.
We want to tell you why you shouldn’t use them and show that they don’t contain reliable information.
We’ll get into the details in a minute, but first let’s take a step back and look at what tick charts are.
Forex tick charts
A tick in the context of Forex charts is a change in the price of a currency pair caused by a single trade.
Thus, unlike charts with time intervals, for example, five minutes or four hours, on tick charts a new candle is printed after several transactions.
The number of trades can be easily changed, so you can get tick charts that print a candle after 144, 233, or 333 trades.
Or any other arbitrary number of trades you deem most appropriate.
Tick charts have several advantages
- They show momentum and market strength much better than time-based candles. For example, if there is a breakout of a range, chances are that on tick charts you will be able to find an entry point much earlier, as the candles will follow each other much faster. This allows you to anticipate large movements.
- If you trade with the trend, waves in the direction of the trend tend to have more trading activity than waves against the trend. This creates a more pronounced trend structure that is much easier to trade.
- On tick charts , periods of low activity are compressed . If the trading intensity is low, it takes a long time for new candles to form, so the charts look cleaner.
Let’s see this in action using the EUR/USD futures. On the left is the 233 tick chart and on the right is the 5 minute time frame.
If the activity is low, the tick chart will display fewer candles than the time chart, which often results in a cleaner trend and better understanding of price action. Sounds good, doesn’t it?
Why You Shouldn’t Use Them
Sounds really great! And tick charts can be quite a valuable asset in a trader’s toolbox, and we have no complaints about them.
The problem is related to Forex tick charts and data that goes into one tick.
Forex Data
To do this, we need to take a step back. Where do brokers get their data from?
The Forex market is huge! With over $5 trillion in daily trading volume, other markets seem tiny in comparison!
But you will only get access to a small part of this volume.
Forex brokers usually source their data from one or more liquidity providers (or create their own liquidity by acting as a market maker).
Liquidity providers can include large institutional banks, financial institutions and ECNs.
Companies such as LMAX and Integral specialize in providing the necessary liquidity to your broker.
Forex tick charts are inaccurate.
Data Accuracy
In a sense, the prices you get from your broker come from this liquidity network.
Forex does not have a central exchange, as is the case with stocks or futures, and each broker has its own piece of the overall pie (with liquidity providers as intermediaries).
The orders that are placed by the clients of this broker, together with the orders from the liquidity network, form all the trades and volumes that you see in your trading platform.
This is not a completely accurate representation of the Forex market.
You see, when you trade futures, each market participant must submit their order on a specific futures exchange (CME, NYMEX, and so on).
The volume and tick data you receive will be 100% accurate information about current market participants.
Whether you are a top institutional bank trader or a retail trader just trying out, you are all in one bundle.
When you trade Forex, orders are placed with your broker, not on a centralized exchange. If your broker takes the other side, they won’t even let their liquidity partners know about it.
Therefore, all tick data and volume data is only an idea of the activity of this particular broker.
This is also the reason why charts may not look exactly the same for different brokers. This is a consequence of the decentralized nature of the Forex market.
Of course, there will be some correlation between your broker’s tick data and the overall market data.
The same goes for the correlation between your broker’s volume and the total market volume. Caspar Marney, a former UBS and HSBC trader, calculated that the correlation would be over 90%.
While there may be some truth to this, it really depends on the broker you use.
And we still wouldn’t rely on data that might be valid (but might also be invalid).
What to do
Although Forex tick data is unreliable and inaccurate, there are a few ways around this:
Currency futures
One option is to trade currency futures.
Most currency futures are traded on the Chicago Mercantile Exchange (CME), one of the largest futures exchanges in the world.
By trading futures, you will have an accurate understanding of the market participants and the volume of transactions of other traders.
The tick charts will represent the actual number of trades, while the volume data will represent the actual volume of currency futures.
Using ECN/brokers with high liquidity
Given what we know about the inaccuracy of Forex tick and volume information, the best we can do is to use brokers that are either part of an Electronic Communications Network (ECN) or have multiple liquidity providers.
After all, the larger your broker’s liquidity network, the more accurate the presentation of tick data and volume information will be.
They will not match the global Forex market data, but at least they will be a relatively accurate, scaled-down representation of the entire market.
However, you can still use tick data to get an idea of market activity.
Not perfect, but sometimes approximate parameters are very useful. Pepperstone (our current broker) is an ECN broker that aggregates liquidity from twenty-two major banks and ECNs.
Because of this, it provides a more accurate view of the Forex market than many other brokers.
Using Historical Aggregated Tick Data
Companies such as TickData are in the business of trading historical tick data. The tick data stream is aggregated from over 95 different sources.
This data is probably closest to what you would get if you had a flood of information from all over the Forex market.
Keep in mind that subscribing to some of the tick data companies is quite expensive.
Also, this data is not provided in real time, so it is less useful in day to day trading.
What do you think about tick data and volume information in Forex? Do you use tick data for Forex trading? Tell us about it in the comments!
