Chapter 2 - Methods of Charting (Done) Flashcards
What are the benefits of charting?
- Charts provide a price history as a visual picture, rather than as a list or table of numbers
- Charts act as a leading indicator by providing an early warning signal that fundamental changes may be taking place
- Charts help identify repetitive price patterns and measured moves out of those patterns
- Charts can help determine entry and exit points and their timing
- Charts can help traders be more mechanical and objective (i.e., less emotional) when trading
What are bar charts?
- Bar charts can be constructed so that each individual bar can cover any number of time periods, from minutes to years
- Bar charts require four pieces of information for each bar: the opening price, the high price, the low price, and the closing price
- Each bar consists of a vertical line with a horizontal line protruding from the left and right side
- The top of the bar represents the high price; the bottom of the bar represents the low price; the horizontal line to the left of the bar represents the opening price; and the horizontal line to the right of the bar represents the closing price
What are line charts?
- Like bar charts, each plot on a line chart can represent a time period that ranges from minutes to years
- Line charts require only one piece of price information: the closing price
- Line charts are also known as close-only charts
What is an arithmetic scale?
A chart scaling method that displays the y-axis on a chart in equal price units, where
the vertical distance between $1 and $3 is the same as the distance between $121 and
$123, for example.
What is box size?
The price unit used in point and figure charts; for example, if the box size is $1,
prices would have to rally or fall by $1 before another X or O is added to the
chart.
What is a lower shadow?
The vertical line extending below the real body on a candlestick representing the
trading range below both the opening and closing levels for a given time period.
What is a measured move?
A price objective or the price level that an asset is expected to achieve based on a chart formation.
What is a real body?
In candlestick charting, the box that is formed between the opening and closing
levels on an individual candlestick; a real body is a graphical representation of the trading range between the opening and closing price levels for a given time period;
the real body is coloured white (or green) when prices have risen, and is coloured black (or red) when prices have declined.
What is meant by “reversal size?”
The number of boxes necessary to reverse a
trend on a point and figure chart; for example, if the box size is $1, and the reversal size is 3, prices would have to fall or rally $3 before the current trend is considered reversed.
What is a semi-log (or logarithmic) scale?
A chart scaling method that displays the y-axis on a chart in equal percentage units,
where the vertical distance between $1 and $3 represents a 200% change in price, for example.
What is an upper shadow?
The vertical line extending above the real body on a candlestick representing the
trading range above both the opening and closing levels for a given time period.
What are candlestick charts?
- Like bar and line charts, candlestick charts can be constructed so that each individual candlestick covers a wide range of time frames.
- Like bar charts, each candlestick requires four pieces of price information: the opening price, the high price, the low price, and the closing price.
- Candlesticks have three distinct parts: an upper shadow, a real body and a lower shadow.
- The top of the real body represents the opening or closing price, whichever is greater; the bottom of the real body represents the lower of the two.
- When the closing price is lower than the opening price (a down day), the real body is shaded (normally black or red). When the opening price is lower than the closing price (an up day), the real body is unshaded (normally green or white).
- The upper shadow extends from the top of the real body to the highest price, whereas the lower shadow extends from the bottom of the real body to the lowest price.
What are point and figure charts?
- Unlike the charts discussed earlier, point and figure charts do not plot time on the horizontal axis; they track only the price movement.
- Point and figure charts consist of a series of vertical columns of Xs and Os.
- A rising trend is indicated by a column of Xs, and a falling trend is drawn with a column of Os.
- Each X and O represents a specific dollar amount, called the box size, which is usually $1 for stocks priced between $20 and $100, and $2 for stocks over $100.
- A new X is added to the top of a column of Xs when the stock rises by the amount of the box size. Similarly, a new O is added to the bottom of a column of Os when the stock falls by the amount of the box size.
- A change from a column of Xs to a column of Os (and vice versa) occurs when the price of the stock moves in the opposite direction to the current trend by an amount equal to the box size multiplied by the reversal size (typically 3x box size).
- The greater the reversal size, the less sensitive the chart is to choppy, sideways trading.
- Note: If a stocks price movement is under the value of the box size it will not be recorded.
What do opening and closing prices represent?
Opening and closing prices represent a consensus of value.
How should a small real body be interpreted?
A small real body should be interpreted as a tug of war between buyers and sellers. This is because the change in price from open to close is very small.
