Lecture11 Charts

8/6/2019 Lecture11 Charts

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Charts

A chart is simply a graphical representation of aseries of prices over a set time frame.

For example, a chart may show a stock's pricemovement over a one-year period, where eachpoint on the graph represents the closing price foreach day the stock is traded.


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ChartsFollowing figure provides an example of a basic chart. It is a

representation of the price movements of a stock over a 1.5 yearperiod. The bottom of the graph, running horizontally (x-axis), isthe date or time scale. On the right hand side, running vertically(y-axis), the price of the security is shown. By looking at the graphwe see that in October 2004 (Point 1), the price of this stock was

around $245, whereas in June 2005 (Point 2), the stock's price isaround $265. This tells us that the stock has risen betweenOctober 2004 and June 2005.


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Charts: Types

1. Bar Charts

2. Line Charts

3. Candlestick Charts

4. Point and Figure Charts


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Charts: Bar Charts

The opening price on a bar chart is shown by thedash that is located on the left side of the verticalbar. Conversely, the close is represented by thedash on the right.

Generally, if the left dash (open) is lower than theright dash (close) then the bar will be shaded black,representing an up period for the stock, which

means it has gained value.A bar that is colored red signals that the stock hasgone down in value over that period. When this isthe case, the dash on the right (close) is lower than

the dash on the left (open).


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Charts: Bar Charts


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Charts: Line Charts

The most basic of all the charts is the linechart because it represents only the closing pricesover a set period of time.

The line is formed by connecting the closing pricesover the time frame.

Line charts do not provide visual information of thetrading range for the individual points such as the

high, low and opening prices.However, the closing price is often considered to bethe most important price in stock data compared tothe high and low for the day and this is why it is theonly value used in line charts.


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Charts: Line Charts


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Charts: Candlestick Charts

The candlestick chart is similar to a bar chart,but it differs in the way that it is visuallyconstructed.

Similar to the bar chart, the candlestick alsohas a thin vertical line showing the period's

trading range.

The difference comes in the formation of awide bar on the vertical line, which illustratesthe difference between the o en and close.


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There are two color constructs for days up andone for days that the price falls.

When the price of the stock is up and closesabove the opening trade, the candlestick willusually be white or clear.

If the stock has traded down for the period,then the candlestick will usually be red orblack, depending on the site.


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If the stock's price has closed above theprevious days close but below the day's open,

the candlestick will be black or filled with thecolor that is used to indicate an up day.


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Charts: Point & Figure Charts

The point and figure charts reflect the pricemovements and are not as concerned abouttime and volume in the formulation of thepoints.

The point and figure chart removes the noise,or insignificant price movements, in the stock,which can distort traders' views of the price

trends.

These types of charts also try to neutralizethe skewing effect that time has on chartanal sis.


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A point and figure chart, has a series of Xs andOs.

The Xs represent upward price trends and theOs represent downward price trends.

There are also numbers and letters in thechart; these represent months, and giveinvestors an idea of the date.


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The other critical point of a point and figurechart is the reversal criteria. This is usually setat three but it can also be set according to thechartist's discretion.

The reversal criteria set how much the pricehas to move away from the high or low in the

price trend to create a new trend or, in otherwords, how much the price has to move inorder for a column of Xs to become a columnof Os, or vice versa.


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When the price trend has moved from onetrend to another, it shifts to the right, signaling

a trend change.


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DOW Theory

Dow Theory on stock price movement is theoldest and best known theory of technicalanalysis.

The theory was derived from 255 Wall StreetJournal editorials written by Charles H.Dow (18511902), journalist, founder and firsteditor of the Wall Street Journal and co-founderof Dow Jones and Company.


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DOW Theory

Following Dow's death, William PeterHamilton, Robert Rhea and E. GeorgeSchaefer organized and collectivelyrepresented "Dow Theory," based on Dow'seditorials.

Dow himself never used the term "DowTheory," nor presented it as a trading system.


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DOW Theory: Assumptions

The six basic tenets / assumptions of Dow Theoryas summarized by Hamilton, Rhea, and Schaeferare described below:

1.The market discounts everything / all news.

2.The market has the three movements theprimary, secondary and minor movement.


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DOW Theory: Assumptions

3. Price bar charts indicate movement.

4. Price/Volume relationship provide background.

5. Rice action determines the trend.

6. The average must confirm.


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DOW Theory

The market is always considered as havingthree movements, all going at the same time.

The first is the main movement or the primary

trend which represents bull and bear phases ofthe market which lasts for at least an year in itsduration.

The second is the short swing or thesecondary movements that at least last for afew weeks to some months.

The third is the daily fluctuations or narrow

movement from da to da .


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DOW Theory

The proponents of the Dow Theory refer to thethree movements as:

a. Primary Movements / Primary Trends

b. Secondary Movements / Corrections

c. Daily Movements / Random day to day wiggles/ Ripples


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DOW Theory

Primary Movements / Primary Trends

The primary movement of share pricesrepresents the long term movements.

If the market price shows the rising trend, thissituation is known as Bull Phase / Bullish

Market.

If the market prices show a falling trend, then itis known as Bear Phase / Bearish Market.


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DOW Theory

Secondary Movements / Corrections

The secondary movement represents thestudy of share prices from 3 weeks to 3months.

It is the study of share prices for short period.

They are opposite indicator of the primarymovements.


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DOW Theory

Daily Movements / Ripples

The investors are generally interested to knowthe daily price movement of the scrip.

This movement represents daily irregularfluctuations in the stock prices. They are

without any trend & are mainly due tospeculative reasons.


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DOW Theory


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DOW Theory


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DOW Theory: Problems

1. It is not a theory but an interpretation of knowndata.

2. There are considerable changes between

actual and prediction.3. This theory is a time-tested method of reading

the stock market barometer, it is mostly

unsuitable as a predictor.4. It does not attempt to explain a consistent

pattern of the stock price movements.


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DOW Theory: Problems

5. The followers can miss out on large gains dueto the conservative nature of a trend-reversalsignal.

6. Another problem with Dow theory is that overtime, the economy - and the indexes originallyused by Dow - has changed.

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Lecture11 Charts