Chart Types 2898

[Originally posted: Tuesday, August 15, 2006 4:43 PM]

I am a big fan of volume charts. Anybody who has read any of the stuff that I have written will already know that. Before the CME made the changes to the way that it reports trades I had already warned about how traders could manipulate the ticks in tick charts but the volume was immune to that manipulation. I wasn't expecting the CME to change the way that it reported trades but according to them bandwidth considerations made it worthwhile for them to report trades less frequently. What this means is that any tick data that you may be examining from before the change is not generated in the same way as tick data after the change. You are no longer comparing like with like.

It is not possible for an exchange to change a time or volume generated data in this way. My objection to using time based data is that you are giving the same weighting to each second, minute, hour, day that you are measuring irrespective of what sort of activity took place during that time. If you are using a moving average to measure a trend of a fairly inactive stock, for example, then that moving average will not take into account high volume days when there was a company announcement and will give you a distorted picture of the average movement of price. It will be an accurate picture if measured over time but if that stock only trades heavily (say) 4 times a year then don't you want to have a better grip on what that stock does around the (say) 4 announcements that are made? If so, you will get more information out of a volume based chart.

Remember that a volume based chart will also contain a time element. Usually that time element will mark the start of the bar and using the start of the next bar you can ascertain how long it took to create that bar. These "time calculations" can be plotted in place of volume bars on this type of chart. Volume bars on a volume chart are obviously not sensible because they will all be the same size.

What got me writing this blog in the first place is that there are many different ways of constructing the X axis in any type of chart. The X axis may sometimes "almost" not exist or be almost invisible. This happens when you create a Market Profile graphic or a Volume at Price style chart.

There is one element that I have found that is common to all types of charts and that is that the Y axis always shows the price of the stock, future, currency, commodity etc. I have yet to find a type of trading or investment chart that uses some other type of measurement for the Y axis. Does this type of chart exist? I don't know, but until someone shows me one I will have to believe that it doesn't. In searching for one I examined all of the exotics like Kagi, Point & Figure, Point Break, Renko, and Range as well as the common Bar, Candle, and Line and the histogram style Volume at Price and Market Profile charts.