Understanding Basic Charting Technique

 

Understanding Basic Charting Technique

 

Technical analysis starts with the visual representation of stock prices in a chart. Despite the fact that there are numerous chart varieties, the types chosen frequently are generally the line chart, the bar chart and the candle chart which is the favored one mainly because it provides the large majority of information and facts.

 

A line chart is not chosen that considerably anymore. It ended up being the essential chart used prior to the beginning of the personal laptop. Stock price data ended up being documented manually, and solely closing prices ended up registered. The line chart was formulated connecting the final prices.

 

For a bar chart, the most expensive together with the least expensive prices within a given period (minutes, hours, days, weeks, or months) can be connected with a vertical bar. The opening price is normally displayed by a tick mark at the left side; the ending price is symbolized through the tick mark at the right side. The bottom and the upper side of the vertical bar represent the cheapest along with maximum prices associated with the time period, respectively. The bar chart is put to use mostly in Western technical analysis.

 

The candle chart has its origins in the Far East. Steve Nison introduced the candle chart to the Western world in his book, Japanese Candlestick Charting Techniques (Nison, 1991).

 

Candle charts clearly depict price development in a trading time period. The body of the candle represents the advance between the opening as well as ending price. If the price closes above the opening price, the candle body is blank (white). If the stock price closes down below the opening price, the candle body is filled (black). A candle can be either a body or a body with long or short wicks, called shadows that extend to the highest as well as cheapest prices during the trading period of time. The understanding of candle-chart patterns is a study unto itself.

 

Searching for price changes of 100% and more it may be a good idea to utilise a logarithmic scaling on the vertical price axis of the chart. If you are using a scale of five points on a linear scale, a price variation from $15 to $30 comprises three divisions, although a price change from $30 to $60 includes six divisions. This may mean that the distance on the vertical axis from $30 to $60 is double as large as the one from $15 to $30. On the other hand, a price move from $15 to $30 or from $30 to $60 equates to the same 100% price increase. A price shifting from $15 to $30 or from $100 to $115 is the same comparable on a linear scale. Evidently, this linear scale does indeed not present a good graphic impression involving everything that the price change actually offers.

 

Going from $15 to $30 equals a 100% price increase, but moving from $100 to $115 equals only a 15% multiply. To have the very same distance on the vertical scale representing similar percent alterations, you may apply logarithmic scaling. This particular scaling means that the distance on the vertical axis from $30 to $60 is at this point similar to the one from $15 to $30, specifically a 100% price increase. This allows a significantly visual effect on charts with considerable price movements.

 

While there are significant price changes, making use of a linear scale might be a drawback. It may definitely not be achievable to sketch a linear pattern line below an upward or downward pattern. However using a logarithmic trend line will certainly provide you the visual help you need to see. Nevertheless, almost all individuals will certainly utilize linear scaling on daily price charts, which is usually fine given that the price variations within limits. More often, logarithmic scaling is usually put on longer-term charts

 

charts, such as weekly or monthly charts, chiefly due to the fact the price moves are substantially more significant. The right alternative is to take advantage of logarithmic price with logarithmic trend lines all the time.

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