Do you really need tick by tick data?

I have found that many traders are looking for tick-by-tick data in their Technical Analysis software without really understanding why they require it, hence this blog post.

Most Technical Analysts have a favorite timeframe for trading. Timeframe or resolution is what each bar or candle in your chart represents. If it represents 1-min, you are trading on a 1-min timeframe, if it is 5-min, you are trading on a 5-min timeframe. Now, one of the cardinal rules in Technical Analysis is that once you decide your timeframe for trading, you should stick to it and not make decisions until the candle or bar formation is complete. What that means is that if you are trading on a 5-min timeframe, you should wait for the 5-min candle to form completely before you make a final decision. In such a case, even if the data were updating tick-by-tick, and you were to make a decision in the middle of the 5-min interval, it would not be of much help, because the picture could change completely once the candle formation is complete.

If you think about it for a minute, it will be obvious why this is the case: Buy/Sell signals in Technical Analysis occur because of support/resistance breakouts or indicator crossovers or candletick patterns (as an example). So for example, suppose you were using a 5-min timeframe and looking at a 5-min chart in a tick-by-tick software. If you found a stock giving a 5-20 EMA Crossover Buy signal at 11:17 am (where the last candle on a 5-min timeframe chart only contains 2 minutes worth of data) and you pressed the Buy trigger, then it is very well possible that by 11:20 am   (by the time you get the complete data for the 11:20 am candle),  the stock could have gone down, and the scenario could be totally different and you might not even have a Bullish 5-20 EMA crossover. Technically, this would be similar to making a decision on a false signal and totally a wrong thing to do if you indeed were trading on a 5-min timeframe.

The only exception to the above rule would be when you want to exit based on stop loss criteria, where you are not using any sell signals based on Technical Analysis. But in most such cases, one can exit based on stop loss orders set with most online brokers today without the need of costly tick-by-tick technical analysis software.

So what timeframe should you use for your trading?

Choosing a Timeframe depends on a lot of factors like what kind of trading you are doing: day-trading, short-term or long-term. But, as a guideline, please note that majority professional traders out there find too many false signals for timeframes lower than 5 min (in fact some even find 5-min timeframes too fast for trading and hence trade only on higher timeframes like 15-min or even 1-hour), but the answer really depends on what type of trading you do. If you do trade on lower timeframes, make sure you have other ways of eliminating false signals (like making decisions based on multiple timeframes, for example).

To summarize:

• Make sure you trade in timeframes where you are comfortable trading (i.e., you know how to deal with the false signals). The lower the timeframe, the more false signals it will generate.
• Stick to that timeframe and don’t take a premature decision unless the candle is complete.

Genuine tick-by-tick software is costly because of the data and if you want to avoid the costly software (especially in tough market conditions like these), you can always go with lower frequency intraday updates in your software and still come out ahead! In fact, that was the whole premise of coming out with a cost-effective 5-min real-time version of Investar in the first place where the data updates in real-time every 5-min! As a matter of fact, some customers have also commented that a 5-min real-time software ensures that they stay disciplined in their trading!