Thursday, December 9, 2010
PART II: CHART PATTERNS
7: ABOUT CHARTS
Charts are Graphical representation of price movement of anything over a period of time. The trend depicted by these charts is governed by the forces of demand and supply. Chart analysis can be used for all markets – Forex, Commodity, Bullion, Crude etc. Stock chart analysis can be applied equally to individual stocks and major indices.
Analysts use their technical research on index charts to decide whether the current market is a BULL MARKET or a BEAR MARKET. On individual charts, investors and traders can learn about the direction of the price movement of their favorite companies.
WHY CHART ANALYSIS?
The understanding of the effect of supply and demand on any product or commodity or stocks is necessary for successful investing. When demand is greater than supply, prices move upward. Should supply be greater than demand, then the prices are forced downward. When demand has absorbed all the supply at any given price, it will begin to absorb the supply available at the next higher price at which offerings are available. Prices recede as a result of absence of demand or an oversupply.
The fluctuations of price changes, when plotted by means of the principles of any charting techniques like Bar Charts, Candlesticks, Kagi or Point and Figure, will more accurately indicate the technical condition, the relationship of supply and demand, than any other known method, which can be used for the purpose.
CHARTS - DRAWING SCALE
Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. It has equal vertical distances between the same percentages of price growth. For example, a price movement from 10 to 20 is a 100% move. A move from 20 to 40 is also a 100% move. For this reason, the vertical distance from 10 to 20 and the vertical distance from 20 to 40 will be identical on a logarithmic chart.
* To enlarge the chart Double click by keeping the cursor above the chart.
CHARTS – TIME FRAME
Stock charts can be created in many different time frames. Mutual fund holders use monthly charts in which each individual data plot consists of a single month of activity. Day traders use 1 minute and 5 minute stock charts to make quick buy and sell decisions. The most common type of stock chart is the daily plot, showing a single complete market session for each unit.
CHARTS USED BY ANALYST
1. Point and Figure Chart
2. Three Line Break Chart
3. Kagi Chart
4. Bar Chart
5. Candlestick Chart
6. Renko charts
Further discussions about charts in forth coming chapters.