Module 5

Chart Construction
 Examples of bars and candles

H H=C H H H
O H
C
O
O C

C C C O L
O

L L=O L L L

O = Open, C = Close, H= High, L = Low

Line Chart
Line Charts

Advantages

Simple.

Give a good general impression- big picture.

Concept is familiar and easily understood.

Very good tool for non-specialized audience.

Line Charts

Disadvantages

Simplicity sacrifices information.

Only the Close price appears.

Open, High, Low prices are not available.

It lacks comprehensiveness.
 Market Action

12
High

10
Open
body
Close
8

7
Low
Bar Chart

The most widely used type of chart in High

technical analysis.
A Vertical Line Bar represents the time
frames range(i.e. daily).
The tic to the left represents the Opening Open
Price.
The tic to the right represents the Closing
Price. Close
The highest point of the bar represents the
High price.
The lowest point of the bar represents the Low
Low price
Bar chart
Bar Chart

Interpretation

Relationship between two consecutive bars

Up day

Down day

Inside day

Outside day
Reversal Bars Key reversals
Reversal Bars Inside and Outside days
Reversal Bars - Spike
Bar Chart

Advantages

Incorporate all data, Open, High, Low, Close.

Gaps, islands and key reversals help analysts understand what is

happening in the market.

The clarity of tops and bottoms makes the construction of trend

lines precise .

Easier to pick-out important extremes both high and low.

Bar Chart

Disadvantages

Experience is needed in its interpretation.

The extra information(Open, High, Low) might obscure the

message in the chart.
Candlestick Chart

High
The Japanese version of bar
charting.
Close
It records Open, High, Close, Low.

The shadow/wick (a thin line) shows

the periods range from the high to
the low.
Open
The real body (a wider portion of the
bar ) measures the distance Low
between the Open and the Close.
 Upper shadow/wick

High High

Close Open
Range of day

Body/Real body

Open Close

Low Low

Lower shadow/wick
Candle Chart
Line Chart

Many chartists believe that the closing price is the most important
critical price (of the trading day). So, for them a line (closing price
only) is a more valid measure of price movement.
Bar Charts vs. Candle Charts

Close < Previous

Close = Red Bar

Open < Close

= Green body
 Bar Charts vs. Candle Charts

Last one correct to Close > Previous

be green? Close = Green Bar
Open > Close
= Red body
26
It is not a friendly game:
Can we Forecast?

This candle creates LOSERS

LOSERS feel FEAR and SELL

So Most Probably the next

one will also be red candle
Technical Analysis is

If you ignore the Human Psychology, movements are random and

you cannot forecast anything

As the Human Psychology tends not to change, we can forecast the

next candle.

Technical Analysis is the method of forecasting (predicting) the

Human Psychology.
Candlestick Formations
Candlestick Formations
Candlestick Formations
Candlestick Formations
More about Candlesticks
Reversal Candles

50%
of body

50%
of body
 Point and Figure Charts

Shows the same price action(bar, candlestick, line charts) but in a

more compressed format.

It consists of alternating columns of xs and os.

The x columns represent rising prices.

The o columns represent declining prices.

Buy and Sell signals are more precise and easier to spot.
Point and Figure Charts
 Arithmetic Price Scale

On Arithmetic Price Scale, the

vertical scale shows an equal
distance for each price unit of
change.

Each point is equidistant.

A move from 5 to 10 is the same

distance as a move from 50 to 55.
 Logarithmic Price Scale

On Logarithmic Price Scale, the

percentage increases get smaller as the
price scale increases.

Prices plotted show equal distances for

similar percentage moves.

For example, the distance from points 10

to 20(100% increase) is the same as the
distance from points 20 to 40 or 40 to 80.