The Technician’s Basic Tool The Price Chart - Sri 0028 -(pdf)

Whether you trade short-term or long-term, discretionary or systematic, your goal as a technician is always the same: to find profitable patterns in price behavior. To accomplish this, technicians use a number of methods to identify the prevailing price trend, or to identify points at which a trend is about to reverse (the time scale, of course, can vary). These basis for these techniques can be roughly divided in two categories: chart analysis and technical indicators. Because basic chart analysis is the backbone of technical trading, well explain the most popular chart types, what they tell you, and...
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The Technicians Basic Tool The Price Chart - Sri 0028 -(pdf)The Technicians Basic Tool: The Price ChartBy Mark EtzkornWhether you trade short-term or long-term, discretionary or systematic, your goalas a technician is always the same: to find profitable patterns in price behavior.To accomplish this, technicians use a number of methods to identify theprevailing price trend, or to identify points at which a trend is about to reverse(the time scale, of course, can vary). These basis for these techniques can beroughly divided in two categories: chart analysis and technical indicators.Because basic chart analysis is the backbone of technical trading, well explainthe most popular chart types, what they tell you, and where chart analysis fits intoan overall trading plan. In future articles, well go into more detail about specificchart pattern and trend analysis.Elements of a price chartPrice charts can depict price action in any number of time frames or styles. Inalmost all cases, though, the horizontal x-axis of the chart represents time andthe vertical y-axis represents price. Before discussing the different types ofcharts, though, there are a few simple, but important concepts you need tounderstand. • High. The highest price of a given trading period, be it an hour, day, week, or month. • Low. The lowest price of a given trading period. • Opening price (or open). The price at the beginning of a trading period (usually a day). For stocks, the open is the price of the first trade that is recorded after the market opens; for futures, the opening price represents the average price (approximately) of the first minute of the trading session. • Closing price (or close). The last price of the trading session (for stocks) or the representative trading price of the last minute of the trading session for futures. The closing price takes on special importance because it functions as a representative price for a particular trading session--the price the market arrived at after a day of trading. The closing price is the most commonly used in technical indicator calculations. • Range. The difference between two specific price levels, most commonly the high and low of a given period. For example, the daily range is the difference between the high and low prices of the day, the weekly range is the difference between the high and low prices of the week, etc. • Volume. The number of shares or contracts traded in a particular market in a given time period (usually day). • Open interest. The number of open trades in a particular market. Both volume and open interest provide measures of liquidity, i.e., the amount of trading activity in a market, and thereby the ease with which you can get in and out of it. Liquid markets are generally less risky and easier to trade than illiquid markets because they are less prone to wild swings or gaps between prices. (However, some traders use strategies specifically designed to profit from the volatility in illiquid markets.)The bar chartThe most popular type of price chart is the daily bar chart, which summarizes theprice action of a trading session as a vertical line, or bar, ranging from the highprice to the low price. The closing price appears as a horizontal hash markextending out from the right of the bar and the opening price appears as ahorizontal hash mark extending out from the left of the bar (sometimes theopening price is omitted).Figure 1. A price bar from a daily bar chart.Figure 1 depicts a typical price bar. A daily bar chart, for example, wouldrepresent each days trading with an individual bar: The high of the bar would bethe high price of the day, the low of the bar would be the low price of day, and theleft and right hash marks would be the opening and closing prices of the day,respectively. The price bar succinctly summarizes the days trading activity: thedaily range (from high to low), where the market opened, and where it closed.Figure 2 shows a daily bar chart for Dell computer.Figure 2. Daily bar chart, Dell Computer.Time framesPrice charts can be constructed in virtually any time frame: minutes, hours, days,weeks, months, quarters, years, etc. A weekly bar chart, for example, would beconstructed exactly the same as the daily bar chart except that it would use thehigh and low prices of the week rather than the high and low prices of a day.The opening and closing prices for a weekly chart are simply the opening pricefor the first trading day of the week (usually Monday, unless there is a holiday)and the closing price of the last day of the week (usually Friday, unless there is aholiday).Figure 3. Weekly bar chart, Dell Computer.Similarly, ...