Hourly to tick-by-tick chart analyses

For most purposes, the treatment of trade-by-trade data is most effectively evaluated with five-minute bar charts. Using the five-minute chart as the base, it is easier to extend to daily, weekly, and monthly chart analysis of the same futures or stocks. Most software for day trading analyses provides for this type of analysis. It is much easier to analyze from a smaller scale to a larger scale than the other way around, as the data collected on the smaller scale can be summarized into larger scales.

The use of tick-by-tick charts is valid if the day trader is an experienced Elliott Wave analyst who needs to discover the wave counts as precisely as possible; for all practical purposes, if the off-floor day trader needs to analyze the market action by ticks, she shouldn't be trading at all.

The off-floor day trader mustn't even attempt to analyze the markets on a tick-by-tick basis, for three reasons: competition from floor traders and stock specialists, delays in price reporting, and incorrect sequencing of trades.

Competition from floor traders and stock specialists. Because it is the province of floor traders and stock specialists to make their living trading so close to the vest, the off-floor day trader would be literally trying to compete with them on their level. This can't be done. If it were possible, then there would be no need for member¬ships on exchanges. Even though the trend is toward trading from off-floor with computers, those who control the programming of the computers will have access to first trades.

Delays in price reporting. Where is the market really trading at while the off-floor day trader is trying to analyze the markets so precisely? Trades executed on exchange floors are reported by the human-machine chain. Early in our survey work to find the most reliable source of data for forex day trading purposes, our firm instructed a floor member at the Chicago Board of Trade to report all price changes in the Bond and Soybean pits over the telephone. The aver¬age delay from the changes reported on the electric boards at the ex¬change to the time we received the changes on our computers was about 10 seconds. In slow markets, 10 seconds of price-reporting delay seems like forever, though this problem can be resolved very easily: Give limit orders close to the last sale for trade execution instead of market orders. In fast markets, a 10-second delay can actually turn out to be forever; this problem can be resolved only with additional trading capital.

There are also many times when the prices and trades are re¬ported incorrectly: Numbers and markets are miskeyed and trade executions are reported in different sequences. Given some of these considerations, the tick-by-tick charts are useful but can often be misleading.

The day trader would be best off viewing the tick-by-tick charts for confirmation of his trade executions and not using them to evaluate market conditions for future trade executions. The tick-by-tick charts should be used only for price-reporting functions and not value-decision-making tools.

On the other hand the use of hourly charts for forex day trading takes a bit too long. There are about six hours of exchange-fostered trading in the average market, so reducing the analysis to segments of six hourly bar charts for analysis offers a maximum number of six decision-making points; that is, the trader makes a decision to enter or exit a trade only after the completion of the analysis of one particular data bar. If the day trader needs many decision-making points, the fact that there are only six hourly points drastically reduces the number of potential trades.

If the day trader waits for market action to unfold during the course of the day—waiting until half the day is over is normal— three of those six decision-making points will have passed, al¬lowing the day trader only the remaining three possible trade exit points for the latter half of the trading session. Until the third or fourth decision-making point passes, the day trader will not gen¬erally have enough information to successfully enter a day trade. At that point, there will be only two or three more data points left to be charted before the end of the trading day.

Implicit in this is the reason for exiting a successful trade: Exit only when sell signals are generated, not when the passage of time limits the trading day.


The day trader may exit profitable trades in either of these conditions:
1. Time is up and the day trader has to close out the trades prior to the day's close.
2. The day trader has profits on his trades and arbitrarily decides to close out the trades.

In either case the day trader would be allowing profits to dictate his trading style.

As will be seen elsewhere in this chapter, successfully making money in the markets must be based on using both loss-cutting techniques and profit-taking techniques. Most experienced traders, however, will tell the day trader that it has been losses that have caused the most damage to their trading, not profits. Arbitrarily defined profits are reflections of the trader's parameters. On the other hand, profit, when defined by market action, is a reflection of the market's conditions.