Once you’ve been trading for a while, you might have come across forex tick charts. The tick charts are usually accompanied by some explanation on why they’re so much better than traditional candlestick charts.
They’re not. Not for spot forex traders at least.
In fact, I’ll make the case on why you should not use them, as they hardly contain accurate information. I’ll tell you why in a moment, but let’s first take a step back and explain what tick charts are.
Forex tick charts
A tick in the context of forex tick charts is the change in price of a forex pair caused by a single trade. So instead of showing time-based charts like a 5 minute or 4 hour charts, tick charts will only print a new candle after a number of trades have happened. The number of trades is completely configurable, so you could have tick charts that print a candle after 144, 233 or 333 trades. Or any other arbitrary number of trades that you feel works best.
Tick charts have a couple of benefits:
- They show momentum and strength much better than time-based bars. For example, if there’s a range break-out, chances are that you can get a quicker entry with tick charts since the candles will follow each other up much quicker. It allows you to anticipate big moves.
- If you’re a trend trader, the waves in the direction of the trend will usually have more trading activity than the countertrend waves. This results in more pronounced trend structures that are easier to trade.
- They compress periods of low activity. If little trading happens, new bars will take a long time to be printed, which might result in cleaner charts.
Here we can see this in action using euro dollar futures. On the left, we have a 233 tick chart and on the right, we have a 5 minute chart.
If there is less activity, the tick chart will output less candles than the time-based charts, which often makes for cleaner trends and a better understanding of price momentum. Sounds good, right?
Why you shouldn’t use them
It does sound good! And tick charts can be a quite valuable asset in the trader’s toolbox, but I don’t have an issue with tick charts themselves. My problem is with forex tick charts, and the data that is used for these ticks.
On forex data
For that, we need to take a step back. Where do brokers actually get their data from?
The forex market is huge! Daily trading volume is well over $5 trillion, which makes other markets seem tiny!
But you only get to access a tiny part of that.
Forex brokers usually get their data from one or more liquidity providers (or make their own liquidity by acting as a market maker). These providers will be big institutional banks, financial institutions and ECN’s. Companies like LMAX and Integral specialize in getting your broker the liquidity feeds it needs.
In a way, the prices you get at your broker will be a reflection of that liquidity network. There’s no central exchange as with stocks or futures, basically every broker will have their own slice of the total forex market pie (with the liquidity providers in between). The orders that are placed by the customers of that broker, together with the orders from the liquidity network, is what makes up the trades and volumes you might be able to see in your brokerage platform.
This is not an accurate representation of the total forex market.
You see, when you trade futures, every market participant will have to submit their order with the with that specific futures exchange (CME, NYMEX, etc). The volume and tick data you get will be a 100% accurate representation of the current market participants. No matter if you’re the top trader at an institutional bank or a retail trader just getting their feet wet, you’re in the same pool.
When you trade forex, the order will be placed with your broker, not a central exchange. If your broker takes the other side, it won’t even be offered to their liquidity partners. Therefore, if you get tick data and volume data, it will be a representation of the activity for that specific broker. This is also the reason why charts of different brokers may not look exactly the same. It’s a consequence of the decentralised nature of the forex market.
Of course, there will be a certain amount of correlation between your forex broker’s tick data and the overall market data. The same goes for the correlation of your broker’s volume and the overall market volume. Caspar Marney, an ex-UBS and ex-HSBC trader, calculated that the correlation would be over 90%. While this might hold some truth, it’s highly dependent on the broker you use. I still wouldn’t want to rely on data that might be valid (but also might not be).
What you should do instead
Given the fact that tick and volume data is unreliable and inaccurate, here are a couple of options to circumvent this:
One option is to trade currency futures. Most currency futures are trading on the Chicago Mercantile Exchange (CME), one of the largest futures exchanges in the world. By trading futures, you’ll have an accurate insight into the market participants and volume of other currency futures traders. Tick charts will represent the exact number of trades and the volume will be the actual volume of the currency futures.
Use ECN / high liquidity brokers
Given that we know how forex tick and volume data is incorrect, the best we can do is use brokers that either are part of an Electronic Communication Network (ECN) or have multiple liquidity providers. After all, the bigger the liquidity network of your broker, the more accurate the representation of tick and volume data will be. It will never match the worldwide forex market data, but at least it will probably be a relatively accurate, scaled-down representation of the entire market.
With that in mind, you could still use the tick data to get an idea of market activity. Not ideal, but sometimes an approximation will do. Pepperstone (my current broker) is an ECN broker which aggregates liquidity from 22 tier-1 banks and ECNs. It will give a slightly more precise view of the forex market than some other brokers.
Use historical aggregated tick data
Companies such as TickData will sell you historical tick data. The feed of tick data is aggregated from over 95 different sources. This will arguably be the closest you can get to having a data feed of the entire forex market. Mind you, a subscription to some of the tick data companies will not come in cheap. Additionally, it’s not real-time data so it’s less useful in day-to-day trading.
What is your view on tick data and volume data in forex? Are you using tick data to trade forex? Let us know in the comments!