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The technical analysis universe is vast and comprised of numerous constellations of tools, techniques and indicators to suit the trading proclivities of just about any chartist. Some will use intraday charts, while others employ only longer-term weeklies or monthlies. Some prefer Japanese candles, while their colleagues swear by point and figure diagrams exclusively.
But however you ultimately create your technical toolkit is up to your investing temperament alone. What follows here is simply a general guide to the types of charts you’ll encounter on your rocket ride through the market technician’s galaxy.
We’ll start our tour by distinguishing between arithmetic (linear) and logarithmic versions of technical analysis chart types, examples of which are seen below.
1) Arithmetic charts are employed by all market technicians and are defined by a vertical scale that progresses evenly higher in round numbers. They look like this:
It doesn’t matter if a stock trades from $10 to $20 or from $990 to $1,000 – a $10 move will cover the same distance on the chart.
2) Semi-logarithmic charts account for percentage increases in the price of a security and are therefore more advantageous for charting longer time frames. Here’s a look at a semi-log scale chart:
Log scaling helps technicians better visualize percentage gains (or declines) in a security, and many rely exclusively on trend lines drawn on such semi-log charts for trading purposes.
So much for scales. Now, on to price display.
- OHLC bar charting is the most commonly used of all price display methods. We wrote about OHLC (open-high-low-close) charting here. Please refer to that previous article for a refresher, and take a look at the sample graphic below.
- Japanese candlesticks are increasingly used by traders, as they’re more visually robust, providing an immediate and clear indication of the price action of the period in question (daily, weekly, etc.).
The open, high, low and closing prices are also represented on a candlestick price display, but the high and low are delineated by a thin line, while the open and close employ a thicker bar. One additional element is also added: up periods are represented by one color (usually white or green), while down days appear in another (generally black or red).
- Point and figure (P&F) charts represent a slightly more arcane form of price display, but the method is not without its advantages. We’ll have more to say on P&F charting in a separate article, but here’s a brief summary.
First up, P&F charts are concerned with price movements exclusively. There is no time scale involved and no means of determining volume. Here’s how they look:
What at first appears to be just a series of Xs and Os is actually a well-ordered means of tracking prices. Each X represents a unit move higher, and each O indicates the same value lower. Numbers and letters occasionally pop up, but more on that later.
The system works as follows:
- Every time price moves higher by the designated unit, another X is added above the last one.
- Every move lower adds another O.
- The only discretionary element to the system is determining the reversal criteria. Many P&F chartists will wait until at least three units are retraced before switching from Xs to Os, or vice versa. All three units are then filled in. In this manner, a lot of the smaller, less significant movements in the stock are eliminated.
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