TPO Charts – What Are They And How Might They Change The Way You View The Markets?

Photo by Nicholas Cappello on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

When traders think of price action, they likely think of Japanese candlesticks. 

Originating from a rice trader in the 18th century, Japanese candlesticks have miraculously maintained their hold on mainstream price visualization to this day. The green and red bodies of Japanese candlesticks are ubiquitous in the trading world, outlining clear expressions of price appreciation and depreciation.

The near-universal adoption of Japanese candlesticks has cast their alternatives into oblivion. There’s a good reason for this; these price-visualization tools are excellent at conveying price action simply. This simplicity is largely uncompromised by a reduction in information. That said, some traders would argue that alternative forms of price visualization can yield benefits that Japanese candlesticks cannot. 

Many such alternatives exist. The Wyckoff chart, developed by stock-titan Richard Wyckoff, represents price action in circles and crosses. Its proponents claim that it’s superior to Japanese candlesticks in its ability to spot accumulation and distribution events and to forecast moves based on these events. Similarly, advocates of Heikin-Ashi candlesticks claim that their chosen tool eliminates a lot of the “noise” that Japanese candlesticks create, which, in turn, creates smoother-looking price action that trend traders can capitalize on. 

For Tradovate LLC, a modern futures trading platform and broker, Time Price Opportunity (TPO) charts provide a unique outlet from which to view the price and volume of securities. Tradovate says that TPO charts’ ability to summarize price and volume information into neatly packaged histograms and zones can potentially allow traders to spot important areas with ease — a key feature in building actionable strategies. 

TPO Charts: A Simple Breakdown

TPO charts are essentially well-kept time capsules.

When trading first started, traders would aggregate in trading pits. Each trader had a trading card, and each trading card had a letter associated with a half-hour period. To execute a trade, traders had to write down their relevant time period in the form of letters. The electronic version of this form of trading survives to this day, and it constitutes the building blocks of TPO charts. 

TPO charts are represented through brackets or periods, which aggregate letters into rectangles or squares of varying sizes. Because each time period starts above the last, what results is a histogram. An example of a TPO chart is shown below. The histogram on the right is a visual representation of the letters on the left.

Photo by Tradovate

Proponents of TPO charts find them incredibly useful when examining the market under the lens of Auction Market Theory, which stipulates that markets are in a constant state of balance and imbalance. One key feature of TPO charts is they can help traders pinpoint specific areas where markets are balanced and imbalanced based on price and volume.

There are many of these areas, the three most important of which are: 

• Point of control (POC): The POC shows the price level where the most volume was traded. In terms of Auction Market Theory, this is where market participants were in agreement over a security’s “fairest value,” and when the market experienced a balanced state.
• Value area (VA): The VA represents the price levels where 70% of the day’s trading volume occurred. 
• Initial balance (IB): The IB represents the range of prices transacted in the first hour of trade. Many regard the IB as a significant range because orders entered overnight or before the open are executed in this time period. 

Poor high/low levels, volume point of control (VPOC) and single prints all contribute to the larger picture that TPO charts create. Information on these important topics can be found here. Scroll down to sign up for a free webinar on TPO charts provided by Tradovate. 

TPO Charts: Developing Strategies

A wider view of the market is needed when using TPO charts, and this perspective typically extends onto the strategies traders use alongside it. 

Questioning where price movement is occurring today in reference to where it was yesterday, for example, is a line of thought that encompasses this wide-side view. Once traders think this way, they can generate different ideas on how to trade current price action. 

For example, consider overlapping value areas. Remembering that value area means 70% of the day’s trading volume, two days with overlapping value areas may provide traders with opportunities to use these high-volume areas to their advantage. 

“One-way traders will use this is to sell [them] around the high of the value area and buy at the lower [end] of the value area on a day where the market is rotating,” Tradovate says.

Another example is to consider higher- or lower-value areas. A higher-value area means that 70% of today’s trading volume took place at a higher position than yesterday’s, implying a potential breakout or continuation to the upside. A lower-value area implies the opposite.

“One of the most important things as a trader is risk management and you should consider your targets when placing your orders. One strategy is taking profits at halfback for part of your position,” Tradovate says.

Find out more on how you can use TPO charts in your favor here. 

Trading TPO Charts With Tradovate

While both Interactive Brokers Group Inc. IBKR and Toronto-Dominion Bank TD provide TPO services, Tradovate reports providing a host of TPO tools that may take it to the next level.

For example, Tradovate’s chart allows you to trade right from the TPO chart window, to create custom session profiles meant for easier overnight-daytime data interpretation and to customize starting letters, colors, and colors per session.

In addition, Tradovate allows you to easily display TPO statistics for session profiles, to automatically extend the untouched full-term POC and full-term VPOC into the future to highlight support and resistance levels and to easily draw initial balance extension levels to create price targets. 

By making its software both Mac- and Windows-friendly, Tradovate attempts to cultivate an environment accessible to all kinds of computer users.

Ready to give TPOs a shot? 

Check out Tradovate and its Beginner & Advanced TPO education. 

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.