Chart Basics Using Bars, Point & Figure and Candlesticks
Technical analysis today comes to us under various and sundry names and disguises, ranging from the granddaddy of technical analysis, Dow’s theory, to a plethora of more exotic forms. However, in its simplest form, technical analysis is the study of the market action itself.
I usually think of technical analysis as “transactions analysis,” a more descriptive and less threatening term than “technical” analysis to many investors. In any case, technicians believe that price action, plus volume in many cases, accurately represents the demand and supply for stocks, and (this is the critical leap of faith), that correct appraisal of the supply and demand factors as represented by price and volume patterns can allow technicians to make reasonably accurate forecasts of future price activity.
The original tool of technical analysis was tape reading, which allowed investors to “read” demand and supply by seeing which stocks were moving, how active they were, and whether they were stronger or weaker relative to others. The basic purpose of tape reading was to answer the question: How is a stock “acting”?
Some investors began to keep charts to facilitate the tracking of important price levels in order to determine the direction of trading. Many original charts were line charts, where just the closing prices were kept over some specified time period. Since then, many variations on the chart theme have developed, and this article takes a look at three popular forms.
Bar charts take the transactions information a bit further, recording the high and low, as well as the close, plus volume, over time. These are the most popular charts today and are available on many computer systems. I’ve asked William O’Neil, founder of Investor’s Business Daily, to help interpret the bar charts found in Daily Graphs, a charting service.
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