Self knowing, Historical Chart Type –part 1

                      History and Construction of Charts

A chart is the traditional tool of the technical analyst. Charts are merely graphical displays of data. Many chart varieties have evolved over the centuries, but the basic principle of graphing price and other important information is the cornerstone of technical analysis. Indeed, in many countries, technical analysts are still called “chartists,” even though hand-drawn charts have become somewhat antiquated because computers display and, in some programs, analyze the price data. Nevertheless, some specialists, floor traders, market makers, and technical analysis departments for brokerage and management firms still maintain hand-drawn charts. These analysts believe that by drawing a chart, rather than allowing a computer to draw a chart or a publishing service to deliver a chart, the fine points of price changes, trends, and patterns become more visible. By taking the time and effort to draw each day’s activity, a personal “feeling” for the price action develops that is more intimate than that gained from a mechanical drawing.

From these charts, technical analysts recognize patterns and trends that can hopefully be useful in trading and investing. Of course, the chart method is also subject to considerable criticism largely because the recognition of patterns and trends is subjective, based on the analyst’s skill and experience. These human attributes are difficult to quantify and, thus, difficult to test.

Some analysts are now using pattern-recognition systems and other sophisticated computerized methods, and early results have demonstrated that, indeed, many of the traditional chart patterns have some predictive value. Charts have other uses, however, if only to observe the history of prices. The benefits of chart use outweigh the problems associated with their interpretation.

                       Benefits of Using Chart

  • Charts provide a concise price history—an essential item of information for any trader (or investor).
  • Charts can provide the trader or investor with a good sense of the market’s volatility-an important consideration in assessing risk.
  • Charts can be a very useful tool to the fundamental analyst. Long-term price charts enable the fundamentalist to isolate quickly the periods of major price moves. By determining the fundamental conditions or events that were peculiar to those periods, the fundamentalist can identify the key price-influencing factors. This information can then be used to construct a price behavior model.
  • Charts can serve as a timing tool, even by traders who base their decisions on other information (e.g., fundamentals).
  • Charts can be used as a money management tool by helping to define meaningful and realistic stop points.
  • Charts reflect market behavior that is subject to certain repetitive patterns. Given sufficient experience, some traders will uncover an innate ability to use charts successfully as a method of anticipating price moves.
  • An understanding of chart concepts is probably an essential prerequisite for developing profitable technical trading systems.
  • Cynics take notice: Under specific circumstances, a contrarian approach to classical chart signals can lead to very profitable trading opportunities (when those signals fail).

                                    History of Charting

The Japanese have the best records of chart use going back to around 1870, when some believe that an “Englishman” brought chart analysis to Japan. On the other hand, the “opening of commodity exchanges in Western Europe (1561) and Japan (1654) provided the necessary environment for the development of the chart” (Shimizu, 1986, p 14).

The information charted and the method of charting often flows from how the market being analyzed operates. For example, the current use of high and low in a bar chart is not feasible in those trading markets that settle a price only once a day.

Plausibly, the first type of chart was just a simple plot on paper of a number, either amount or price, and a date. In early Japan, for example, rice was traded by amount. Instead of a price per bag, it was the number of bags per price that was recorded by the famous rice trader Sokyu Honma in the 1750s. As markets began to trade more frequently during the day, the chart became more complex.

A high and low price could be recorded, and eventually as multiple trades occurred, an open and close price could be added. Volume was recorded much later when more complete and public records were available. At first, the prices were just recorded by witnesses located in the marketplace. Eventually, markets became better organized, and prices and amounts were made publicly available.

Thomas Alva Edison’s invention of the ticker tape, which was patented in 1869, allowed for point-and-figure charting, because such charts required knowledge of every price at which an item had traded during the day. Without the ticker tape, the gathering of this information would have been difficult in markets with multiple trades during a day.

Modem technology has greatly simplified the task of chart construction. Computer power has replaced much of the tedious human work. Now, even basic home computers have spreadsheet programs, such as Excel, that can store daily stock price data and create a variety of charts used by technical analysts. In addition, other sophisticated software programs that are specifically designed for technical analysis are readily available. These programs not only plot charts and indicators or oscillators but also can test trading rules Examples are Tradestation (www.tradestation.com), Metastock (www.exness.com), and AmiBroker (www.amibroker.com). Today, the technical analyst can focus much more time and attention on analysis and much less on chart construction.

Over the years, technicians developed several different approaches to chart construction. The five main categories of charting that we discuss in this chapter are line charts, bar charts, candlestick charts, and point-and-figure charts and equi-volume charts. Each approach has its own features, benefits, and drawbacks. Whichever method a technical analyst chooses to use, charts serve as the technical analyst’s roadmap. Chart give a quick and concise picture of past price action.

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