Charts are a very important part of technical analysis as a whole. There are different kinds of charts available – bar charts, line charts, candlestick charts, point and figure charts.
Bar Chart is a vertical line on a graph where the bottom end of the line is the low price and top part is the high price for the period (independent of the length of the period). This kind of chart usually shows time in the bottom horizontal line and price in right vertical line. If you can see hyphens (-) on the point of the left side of the chart high-low price then this represent the open price. And this case there is always also the closing price in the right side of the high-low price. If all thos four features are shown on the chart this chart can be referred to as OHLC chart (OpenHighLowClose). Depending on the features shown it can also be a OHL or HLC chart etc.
Depending on how long investments you are interested in you also need to choose the period for the chart. For long term investors weekly and monthly charts are of most importants while for day traders hourly charts for a week are very important.
When examining charts, there are two new terms which you should know about –resistance and support level. Resistance level is a price level above which it is most likely difficult for the stock (or market) to rise. Support level is a price level below which it is most likely difficult for a stock to fall.
Line Charts usually contain only closing prices which are connected with one line. Many investors believe that the close price is the price to follow as intraday highs and lows may not give good enough picture.
Candlestick Chart is pretty much the same as a bar chart. However, while bar chart *may* include the open price, candestick chart always includes the open price. Candlestick chart has several features that a bar chart doesn’t and it looks a bit different. The thick part on the chart is called the real body and means the price range between the open and close price. If the close price is higher than the open price then the body is white/hollow, if the open price is higher than the close price the body is black. Thin lines on the chart are called shadows where the top means period high and bottom means period low. Candlestick charts give a better visual view of the possible trends and certain types of candlesticks can predict reversals in trends.
Couple of candlestick chart patterns
- The hanging man and the hammer. It predicts that the market is about to start a down-trend. How to see a hanging man? Generally the thick part (real body) is at the upper end of a recent price range, lower shadow (period low) is twice the hight of the real body and it has no upper shadow or has just a short one. The longer the lower shadow and shorter the upper shadow the better the chance is for trend reversal. Hammer is basically the opposite the hanging man with the difference that the real body should be in the lower end of the recent price trend.
Point and figure charts view trading as a single stream independent of the duration. It just lists all different prices. Point and figure chart is constructed of a number of X’s and O’s. Each X and O represent some sort of price move. How big price move it represents, depends on the BOX size (which you can set yourself). X represent and advance in price of box size and O represent a decline of box size. If the last price change was X and the next price change is also X (advance of a box size) then the second X will be put just above the previous X. And so on until an 0 (decline of a box size) happens. Then the 0 will be put to the right side, one X below the top. Eg.
....excuse me for this neat chart but you should get an idea. This shows that there has been 3 advances (of box size) in a row and then one decline.
Note that if the price change is less than box size, then we won’t put any any additional X or 0 to the chart. We add a new X or O only if the new high or low is higher or lower from the last price of a full box size OR more.
When previously I said that if for example the row of X’s ends and 0’s start then you add the 0 below the previous X. There is actually one more term which I didn’t mention – reversal size which is usually also set on the chart. This means that if the market is advancing and the price decline now is equal to the reversal size or more, a column of at least reversal size times O’s is added to the next column in descending order.
I must admit that this is not very clear to me how it all works, so bear with me, hopefully I’m right. Or if I’m not, you’ll hear about it in my upcoming more specific posts about Point and figure charts. But the way I understand it – lets say the box size is 2 and reversal size is 5. If the price change is 2 or anything below 5 then one X or 0 is added accordingly. However, if the reversal size is 5 or more, then the next column is start 5 X’s or 0’s below or above the last point.
The advantage of using point and figure charts is that it helps you you to better define support and resistance areas. It also makes it easier to find the potential of the price moves whether up or down. We check which horizontal line has the most x’s and 0’s in it, then count the total number of boxes accross. When there is a rally or decline count the same number of boxes on the vertical price scale and you’ll arrive at the minimum price objective. Confusing...I know, but don’t worry, we’ll get to understand it all bu the end of the day/month...year?
This kind of chart also generates sort of trading signals. For example if the column of X’s rises one box higher than the previous column of X’s. And vice versa for declines. This technique is more useful for short-term traders.