It looks similar a normal chart, but there's a difference.
Almost all charts are denominated inwards time. We tin accept cost on the Y-axis, nosotros tin demo an oscillator or indicator on the Y-axis, but the X-axis invariably reflects time.
Time is a chronological event, whether nosotros mensurate fourth dimension inwards birthdays or inwards the deportment of cesium atoms.
Where is it written inwards rock that markets displace inwards chronological time? Lopez de Prado explains that our reliance on chronological fourth dimension is "rather arbitrary", equally it reflects the operate of the Sun inwards agricultural societies. He describes the "new paradigm" inwards marketplace analysis equally i inwards which nosotros displace from chronological fourth dimension to lawsuit time.
Indeed, in that location accept been efforts to free marketplace charts from the strictures of chronology. Point-and-figure charts push clit a novel bar when a threshold marketplace displace is made, making marketplace crusade the X-axis. Richard Arms adjusted the width of chronological bars for their volume, thereby changing the scale of the X-axis. Lopez de Prado's high-frequency trading straight denominates fourth dimension inwards volume, equally each X discover of contracts or shares represents a fourth dimension unit. As he points out, this brings a discover of statistical advantages, including eliminating intra-session seasonal effects (e.g., changes inwards book in addition to volatility equally a business office of fourth dimension of day).
Once nosotros free the X-axis from chronological time, nosotros opened upwards ourselves to the graphical display of many relationships. Just equally the X-axis tin bucket crusade or volume, it could reverberate units of stance change, volatility, correlation change, relative forcefulness change, etc. My sense is that such lawsuit fourth dimension charting displays relationships that are non straight off apparent when looking at touchstone charts based on chronology.
So dorsum to the inwards a higher house nautical chart of the terminal calendar week inwards ES. H5N1 fresh bar is drawn every fourth dimension the cost of ES moves 500 times. During busy periods, nosotros run across to a greater extent than bars; during deadening periods, nosotros run across fewer. If you lot had a trading organisation that went long or brusque alongside an X-bar signal, the organisation would hand you lot to a greater extent than trades inwards busy markets--and busy marketplace times--and fewer trades during deadening markets.
In other words, the nautical chart would non alone normalize marketplace activity statistically, but it would normalize the trader's behavior, creating fewer trades when markets offering less movement. That makes the event-time nautical chart a psychological tool, equally good equally an analytical one.
I volition survive posting to a greater extent than on event-time analysis inwards the nigh future.
Further Reading: Overtrading in addition to Market Expectations
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