PART II: CHART PATTERNS

PART II: CHART PATTERNS

 8 - B: CLASSIFICATION OF CHARTS  

5.  ‘OPEN HIGH LOW CLOSE’- (Bar) - Chart

An open-high-low-close chart (also OHLC chart or simply Bar chart) is typically used to illustrate movements in the price of a financial instrument over time.

 Each vertical line on the chart shows the price range (the highest and lowest prices) over one unit of time, e.g. one day or one hour. Tick marks project from each side of the line indicating the opening price (e.g. for a daily bar chart this would be the starting price for that day) on the left, and the closing price for that time period on the right. The bars may be shown in different colors depending on whether prices rose or fell in that period.

* To enlarge the chart Double click by keeping the cursor above the chart.

The Japanese candlestick chart is another way of displaying market price data, with the opening and closing prices defining a rectangle within the range for each time unit. Both charts show exactly the same data, i.e. the opening, high, low, and closing prices during a particular time frame. Some traders find the candlestick chart easier to read.

6.  Candlestick Chart

 

A candlestick chart is a kind of bar-chart used primarily to describe price movements of a security, derivative, or currency over a period of time.

It is a combination of a line-chart and a bar-chart, in which each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns.

Candlesticks are usually composed of the body (black or white), and an upper and a lower shadow (wick). The area between the open and the close is called the real body, price excursions above and below the real body are called shadows.

CANDLESTICK

The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. A candlestick can have either a body or a wick or both.

To better highlight price movements, modern candlestick charts (especially those displayed digitally) often replace the black or white of the candlestick body with colors such as red (for a lower closing) and blue or green (for a higher closing).  

Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading. For example, when the bar is white and high relative to other time periods, it means buyers are very bullish. The opposite is true for a black bar. 

GOLD CANDLESTICK

TATA STEEL CANDLESTICK

It is not necessary to master all kinds of chart reading. In my opinion mastering the Bar Chart is more than enough. Candle stick chart can be useful for some short term trading.

Hence we will be discussing the chart patterns and its implications using OHLC charts in our next session

Dr.Felisleo

23.12.2010

Part II : Asset Building through Equity

Part  II :   Asset  Building  Through  Equity

CHAPTER 8: BUSINESS CYCLE

“THE UNSEEN FORCE THAT MOVES THE MARKET”

Embark upon an action after careful thought. It is folly to say,

"Let us begin the task now and think about it later."    

                                                                              THIRUKKURAL   Verse 467

WHAT IS BUSINESS CYCLE?

A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

It is a long-term pattern of alternating periods of economic growth (recovery) and decline (recession), characterized by changing employment, industrial productivity, and interest rates. Also called as economic cycle.

A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable. A business cycle is identified as a sequence of four phases:

 “Schumpeter” labeled the "four-phases" of a cycle as: 

                                   Boom – Recession – Depression - Recovery.

Depression:

 When the economy is characterized by large unemployment rates, a decline in annual income, and overproduction, it is said to be in a state of depression. The point at which the real GDP stops declining and starts expanding is the lowest point. Sooner or later, the recession will reach the bottom of the business cycle. How long the cycle will remain at this low point varies from a matter of weeks to many months. During some depressions, such as the one in the 1930s, the low point has lasted for years.

 Peak:

The point at which the real GDP stops increasing and begins its decline signifies the highest point. At the top or peak of the business cycle, business expansion ends its upward climb. Employment, consumer spending, and production hit their highest levels. A peak, like a depression, can last for a short or long period of time. When the peak lasts for a long time, we are in a period of prosperity.

One of the dangers of peak periods is that of inflation. During periods of inflation, prices rise and the value of money declines. Inflation is more of a threat during peak periods because employment and earnings are at high levels With more money in their pockets, people  are willing to spend more than before In this way, demand is increased and   prices rise.

How we measure business cycle?

The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.

What are Real GDP and Nominal GDP?

Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. In other words, it also considers the effect of inflation on the value of goods and services.

The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. It does not consider the effect of inflation on the value of goods and services.

 Stages of Business Cycle :

Expansion: A speedup in the pace of economic activity, resulting in expansion of production and employment.

Peak: The upper turning of a business cycle is characterized by peak production, highest employment and highest inflationary pressure. Low levels of both unemployment and labour shortage push up wage rates. High levels of consumer borrowing and spending occurs. During peak, Firms work at full capacity, profit levels will be high, and inflation and interest rate will be increasing. There will be a “boom” in housing market.

Contraction: A slowdown in the pace of economic activity. During contraction, Industrial production and employment go down.

Trough: (Recession) Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation fall during recessions. Bankruptcies and the unemployment rate rises. Production and employment hit the lowest levels.

 Revival: The lower turning point of a business cycle, where a contraction turns into an expansion. Consumer confidence grows leading to increased borrowing and spending. Firms increase output, build up stock levels, Spare capacity used, then Investment increases and Unemployment falls. It may take more than a year of recovery for large changes in unemployment.

How the real economy and financial markets interact? We will discuss in the following chapter.

Dr.Felisleo

19.12.2010

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PART II: CHART PATTERNS

PART II: CHART PATTERNS

 8 A :  CLASSIFICATION OF CHARTS 

Introduction:

In stock and commodity markets charts represents the pattern of price movement over a period of time. In these charts y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale.

CHARTS USED BY ANALYST

 1.  Point and Figure Chart

In this chart time is not taken for plotting the chart. Plotting is done based on day to day price movement. Point and figure charts are composed of a number of columns that either consists of a series of stacked ‘X’s or ‘O’s. A vertical line of ‘X’s is used to illustrate a rising price, while ‘O’s represent a falling price.

2.  Three Line Break Chart

This is a popular financial charting method used in Japan. This chart also ignores the time element.  These charts display a series of vertical boxes

 ‘lines’ that reflects changes in price values.

3.  Kagi Chart

Once again a chart developed by the Japanese in the 1870s that uses a series of vertical lines to illustrate general levels of supply and demand for certain assets. Thick lines are drawn when the price breaks above the previous high price and is interpreted as an increase in demand.  Thin lines are used to represent increased supply when the price falls below the previous low. This chart also does not give importance to time.

4. Renko charts

The filled and hollow squares that make up a Renko chart are often referred to as "bricks." Renko charts have a pre-determined "Brick Size" that is used to determine as to when new bricks need to be added to the chart.

 If prices move more than the Brick Size above the top (or below the bottom) of the last brick on the chart, a new brick is added in the next chart column. Hollow bricks are added if prices are rising. Black bricks are added if prices are falling. Only one type of brick can be added per time period. Bricks are always with their corners touching and no more than one brick may occupy each chart column.

Renko charts may not change for several time periods. Prices have to rise or fall "significantly" in order for bricks to be added. Hollow bricks are bullish, black bricks are bearish.

TO BE CONTINUED

Dr.Felisleo

16.12.2010

Part II : CHART PATTERNS

PART II: CHART PATTERNS

 7:  ABOUT CHARTS 

Introduction:

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.

Dr.Felisleo

9.12.2010