Technical Analysis Tools— Charts

Charts (Line, Bar, Candlestick, Point and Figure).

First, determine the box size and the reversal size.

Box size refers to the change in price represented by the height of each box (boxes are generally square, but the width has no meaning).

The reversal size is used to determine when to create a new column. (most common size is 3)

The horizontal axis represents the number of changes in price, not time.

The vertical axis measures discrete increments of price.

X represents an increase in price and O represents a decline in price.

A logarithmic scale, equal vertical distances on the chart correspond to an equal percentage change, appropriate when the data move through a range of values representing several orders of magnitude (e.g., from 10 to 10,000);

A linear scale(arithmetic scale)  is better suited for narrower ranges.

[Practice Problems] In constructing a chart, using a logarithmic scale on the vertical axis is likely to be most useful for which of the following applications?

A.       The price of gold for the past 100 years.

B.        The share price of a company over the past month.

C.        Yields on 10-year US Treasuries for the past 5 years.

[Solutions] A

The price of gold in nominal dollars was several orders of magnitude cheaper 100 years ago than it is today (roughly US$20 then versus US$1,100 today). Such a wide range of prices lends itself well to being graphically displayed on a logarithmic scale.

Volume is used to assess the strength or conviction of buyers and sellers in determining a security’s price.

Long intervals: chart longer time periods, contain fewer data points, so a longer time frame can be presented on the chart.

Short intervals: see more detail.