INTO THE WORLD OF CHARTING
 
 
We have covered so far the rationale for technical analysis and followed that up with some psychological and practical considerations. There are of course plenty more to consider in those two main areas but we shall leave them now to enter the world of charts. In the last write up we looked at the basic tool of the technical analyst – the chart and the means to draw one. We shall proceed with the assumption that all readers are serious and committed (!) and therefore will choose to go in for software.
 
TYPES OF CHARTS
 
The first issue to consider is the type of chart we shall look at. This will depend upon the data that we get. The data is stored in databases in the following formats: Open, High, Low, Close. Along with this, the Volume for the day is also stored.
 
We can now call upon the software to plot the chart using all or any of the data points indicated above. The type of the picture that forms would decide the type of chart. We have the following chart types as the most common ones:
 
  • Line Chart
  • Bar Chart (HiLo chart)
  • Candlestick Chart
 
There are other less commonly used chart forms called Point and Figure Charts, Renko, Kagi, Three Line break etc. Many of the commonly available software do not feature them. Hence they will not be discussed in this article except briefly. For more details on them, one is referred to some textbook on technical analysis.
 
PLOTTING CHARTS
 
There are two elements in charting – the Price (the data point) and the Time (daily, weekly etc). The vertical scale of the chart (y axis) is for the price while the horizontal scale (x axis) is for the time period. One data point therefore corresponds to the time period against it.
 
Now one can plot any or all of the data points that are available (Open, High, Low, Close). One of the commonest ways of plotting charts is to use only the Closing price. This is placed as a dot against the day of trading and then a series of dots like these are joined together to produce what is known as a Line Chart or also known as a Closing chart. The following is an example of a line chart.
 
One could also use another form of charting which takes all the four data points (OHLC) and plots them as a Bar and hence it is known as a Bar chart or sometimes as a Hi Lo chart or even OHLC chart. In this, one plots the High and the Low of the day as two dots (vertically on the same day), then joins the two points with a vertical bar. This leaves us with two more data points – the open and the close. These are shown on the chart as small horizontal lines on the vertical line joining the high and the low. Naturally, this is a more descriptive chart as compared with the Line chart. At one glance of the Bar chart, one can learn where the stock opened, how high it traded and how low and finally, where it closed. The chart given to the right is an example of a bar chart.
 
It is the same company as the line chart but one can see that it is a more descriptive chart than the earlier one. To spot the open and the close (marked as a horizontal line on the vertical bar) one has to look a little more closely or blow up the chart magnification. Each bar represents the trading action of one time period. This time period would be either one day, or one week or one month or could even be intra day. Depending upon the time period chosen, we would find out the OHLC of that time period. For a weekly chart, the open would be Monday open; the high and low reached during the week and the close would be Friday close.
 
For a monthly chart, it would be the opening of the first trading day of the month and the close would be the close of the last trading day of the month with the high and low of the month recorded for H and L. In intra day charts, the time frame is chosen by minutes – 60 minutes, 30 minutes etc. and the OHLC within that time 30 minute or 60 minute time frame is plotted. We can go down to as low as a Tic chart – which would be a line chart – which would record every Tic (a trade) of the day. But this would be voluminous chart as an active stock can have anything from 2000-5000 tics in a day!
 
The Bar chart does not tell us one thing. The relation between the open and the close. This is important because it tells us the mindset of the people and how it functioned during the day and at the end. The open is always well thought out because it is the culmination of all that has been learnt overnight. The close is a more considered opinion as it takes into account all the happenings during the day along with what views had been held at the open. Hence the direction of the close vis-à-vis the open is very essential. This will tell us if the ending session was more bearish (close below open) or more bullish (close above open). This logic has been imported into another form of charting called the Candlestick charting. Here the same four data points (OHLC) are used. The open and close are plotted first as two vertical points and then joined together by a small rectangle like box and the highs and lows are depicted as small lines beyond this box. In appearance, this looks like a Candle – with a body and a wick. Only, this will be a candle with a wick at either side! Hence the name candlestick charts.
 
The candlestick differentiates the two stages of the day by color coding the body of the candle - black if the close is below open (bearish) and white if the close is below open (bullish). Hence the individual candles are also known as bearish and bullish candles or black and white candles. A candlestick chart looks as in the chart given alongside. It can be seen in the chart the market picture gets more vivid when expressed in form of candle charts.
 
SCALING
 
Now that we have discussed the different types of charts, we need to take a look at the aspect of Scaling. We normally think in terms of arithmetically scaled charts i.e. charts where the increments on the Y-axis move up by equal amounts. This is the commonest form of scaling used in charts. But think of this. ACC moved from a low of 128 to 10500 in a span of about two years. Infosys has moved from double digits to five digit numbers. How can such stock price moves be fitted in a single chart? No doubt, the computer will be able to do so but if one is using hand plotted charts; the run away stock is a nightmare.
PERCENTAGE SCALE ARITHMETIC SCALE
SAME STOCK BUT SEE THE DIFFERENCE IN THEIR VIEW!
 
The two charts above show the same stock between the same time periods. The difference in the detailing is clearly evident. The chart on the left is the semi log scale (percentage) while the one on the right is an arithmetically scaled chart. One can see a lot more detail of the lower prices in the chart on the left while almost none are visible on the chart in the right. This is because the price move occurred from a low of around 65 to a high of 3500.
 
When such long price moves are to be seen, it is always better to switch to semi log scaled charts. The use of a software makes this change over quite easy. If hand drawn charts were maintained, one would have to make two separate charts for the same. In general, longer-term charts should be viewed using semi log scale (as they would contain more price data than a short term chart).
 
OTHER CHART FORMS
 
There are a couple of other charting techniques. The Point and figure chart for example,does away with Time as an element and concentrates only on price. In this chart, no plots are made unless the prices move by a certain predecided amount. Lets say we define the market movement to be of value only if there is a movement of 5 points (from 240-245 for e.g). We would plot only if such a move occurs. All moves below 5 points are ignored. Kagi and Renko and Three Line break charts are also similar price oriented plots with different logics for making the plot.