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TSAA-SF Study Guide & Certified Exam

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Section 2: Basic Charting Techniques

One would think that plotting stock market data might be an easy task, but in fact there are many ways to visually present prices on a graph. This section explains the methods one can use to show open, high, low and closing price data, as well as corresponding volume levels. Each method has its benefits and limitations which must be acknowledged before deciding which technique to use. Some may be used together.

Charting Price Data

First let's cover the basic introductory concepts...

Overview of Price Chart Construction:

Linear Versus semi-Log:


Types of Price Charts

There are three major chart types to learn in this section: Line, Bar and Candlestick Charts. As mentioned above, there are certain benefits to using each – specifically Candlesticks, which contain the same data as Bar Charts but can be visually more efficient at presenting price patterns. Keep in mind that more complex charts do not necessarily offer greater accuracy. Using the appropriate chart type can be essential to correctly evaluating price patterns.

 

Line Charts are displayed just as the name suggests, as a line that moves higher and lower continuously as prices adjust.


Construction:

   Line Chart

Bar Charts provide volatility information that line charts lack.

Construction and Characteristics:

Candlesticks present essentially the same data as an OHLC Bar Chart, but have the advantage of being easier to spot price patterns.

History:

   History
   Candlestick Charts
   Formation
   Long Versus Short Bodies
   Long Versus Long Shadows

The Advantages of Candlestick Charts are that they can reflect intraday moves, but also be used to identify both reversal and continuation patterns. Because of the extensive history of Candlesticks, there are many well established patterns, which we discuss in detail below.



Point & Figure Charts

This unique style of plotting price data is one of the oldest forms of charting. Despite its age, Point & Figure remains one of the most useful tools for deciphering trend direction, magnitude and for estimating potential price targets. Below we review how P&F charts are constructed as well as a few of the common price patterns.

History of Point & Figure:

   History

Construction:

The two biggest advantages of using Point & Figure charts is that they can quickly identify long-term trends and that they have an objective, rules-based methodology.

There are also some common patterns in Point & Figure analysis, some bullish, some bearish.


Volume

One corollary to price data is the amount of volume traded. If the security being examined is Equity, then we measure the number of shares traded, while Commodities’ volume is measured in contracts traded. No matter what the unit of security traded, volume levels and have an influence on the validity of price patterns that develop. Volume indicates how committed investors are to their expectations about the price level. How successful the pattern ultimately works out to be can be deciphered early on by the volume level.


Various methods can be employed to graphically present volume data.:


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