What’s in Your Charts? Charting Methodologies

I am planning to make a few posts on charting, as I am becomming disenchanted with candlestick charts for intraday trading. If you follow my jaiku, twitter, and/or wallstreak conversations lately, you know I don’t even look at a chart when timing my trade entries and exits anymore.

You see, I am one of those people that doesn’t think the price at 10:45 matters any more than the price at 10:44. Because of that, even though I look for ideas on 15-minute charts, I am constantly checking the 5-minute and 1-minute charts to see what’s “really” going on.

I can’t help but think that the only reason I have to do that is because time-based charts are not really what I want.

Way back in my “put the detail back into your slow charts” article, I pointed out one type of chart enhancement. That idea was essentially to only look at derived indicators against 1-minute chart data. And yet, even then, I would still be deriving summary information from arbitrary 1-minute intervals. Maybe there’s something even better?

Here are the major charting ideas I’m aware of, and have easily available to me. I’ll give the chart type, and the basic charting philosophy, as I understand it:

• point-and-figure charts: What matters are the points of trend-reversal, where prices move significantly after changing direction. It doesn’t matter how long it takes, or how many trades go by, or how much volume is trading.
• tick charts: When the stock isn’t trading very quickly, there’s no sense in breaking out a bunch of detail. We want finer granularity when there is excitement. So, each candle will represent a set number of trades, and when the stock is trading quickly, new candles will be produced quickly. It doesn’t matter what the price is doing, or how much volume is involved, or how long it’s been since the last candle.
• volume charts: Price moves (or doesn’t) when shares change hands. The more shares, the bigger the effect. So, we will make a chart where each candle represents a set number of traded shares. When more volume is trading, candles will be generated faster. Thus, we will get the “zooming in” effect and show more detail when lots of volume is flowing. This is a very similar philosophy to the tick charts, with the volume focus rather than the trade focus.

I also keep stumbling across so-called “equivolume” charts. These are time-based charts, but each candle’s width reflects the amount of volume traded. So, fat candles represent high-volume. I believe the guy behind the TRIN indicator also developed this idea, so I would like to read more about these, or play with them. Unfortunately, none of my platforms will draw them so I’d have to pull together the energy to code it myself.

Over the next couple weeks, I will be glancing at different chart types during the day, and hopefully finding good examples to post. I think the best approach (which I alluded to in my earlier article), is to ask yourself “what do I want the chart to show me?” And, then find the charting style (or a combination of charts) that makes the patterns you want to find as clear as possible. I’m really beginning to think time-sliced candles is not the best way to find good trading opportunities.

Now that I have QT, which can give me a day’s worth of tick-by-tick data, and a haskell+SVG way to draw candlestick charts, I can even try wacky new charting ideas and publish them here.

In the meantime, I’d love to hear your thoughts…. what kind of charts do you use, and do they show you what you need to see? Have you tried some of the less-standard charting types, and what was your experience with them?