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Technical analysis starts with the graphical representation of stock prices in a chart. Let’s have a look at the different charts and which type provides the most information.
Although there are many charts, the ones listed below are those used most often, and the candle chart is preferred because it provides the most information.
A line chart is not used much anymore. It was the basic chart used prior to the advent of the personal computer. Stock price data was registered manually, and only closing prices were registered.
The line chart was created connecting the closing prices (figure 4.1).
Figure 4.1: Line chart.
The highest and the lowest prices in the given period (minutes, hours, days, weeks, and months) are connected with a vertical bar.
In figure 4.2, the opening price is represented by the tick mark at the left side; the closing price is represented by the tick mark at the right side.
The bottom and the top of the vertical bar represent the lowest and highest prices of the period, respectively.
The bar chart is used mostly in Western technical analysis.
Figure 4.2: Bar chart
The candle chart has its roots in the Far East. It is believed that Mr. Homma, a Japanese rice merchant, used candle charts for the first time around the year 1850. Steve Nison introduced the candle chart to the Western world in his book, Japanese Candlestick Charting Techniques.
Candle charts clearly depict price development in a trading period. The body of the candle in figure 4.3 represents the move between the opening and closing prices.
If the price closes above the opening price, the candle body is blank (white). If the stock price closes below the opening price, the candle body is filled (black).
Figure 4.3: Candlestick chart.
A candle can be either a body or a body with long or short wicks, called shadows that reach to the highest and lowest prices in the trading period.
The recognition of candle-chart patterns is a study unto itself. We will discuss most of these patterns in chapter six. LOCKIT basically uses candle charts because candle patterns are part of the decision making process and most common used on the daily charts.