college level introduction to technical analysis history ... · college level introduction to...

History and Construction of Charts

l The advantages of presenting price information in a picture or chart format

l The construction of line charts

l The construction of bars charts

l The construction of point & figure charts

l The construction of candlestick charts

l The differences between arithmetic and logarithmic scales

Lecture 2Objectives

ReadingMaster Textbook

Technical Analysis: The Complete Resource for Financial Market TechniciansCharles D. Kirkpatrick and Julie R. Dahlquist

Part III - Pages 189-215

Additional ReadingTechncial Analysis of the Financial MarketsMurphy, John, pages 35-47, 265, 296-309

Technical Analysis of Stock Trends, 7th EditionEdwards, Robert & Magee, John

The Fourth Mega-MarketAcampora, Ralph, pp 30-49, 51-82

Study Helps in Point and Figure TechniquesWheelan, Alexander

Beyond CandlesticksNisson, Steve

Volume Cycles in the Stock Market: Market Timing Through Equivolume and ChartingArms, Richard

College level IntroduCtIon to teChnICal

analysIs

This lecture series is produced by the Market Technicians Association

Educational Foundationbased on the detailed class notes of

Charles D. Kirkpatrick II, CMT Copyright © 2010. All rights are reserved.

history and construction of charts

M a r k e t t e c h n i c i a n s a s s o c i at i o ne d u c at i o n a lf o u n d a t i o n

Identifying and funding educational programs in the field of Technical Analysis since 1993

Mta educational foundationPost Office Box 425127

Cambridge, MA 02142-5127617/253-8959

[email protected] • www.mtaef.org

history and construction of charts • Lecture 2, page 2College Level Introduction to Technical Analysis

Basics of Charting

•. Technical analysts believe that the market action discounts everything, prices

moves in trends and history repeats itself.

– Technical analysts base their outlooks on the belief that price action shows

the shifts in supply and demand. If demand exceeds supply, prices should

rise. If supply exceeds demand, prices should fall. This is called price

discovery.

– Prices move in trends. This simply means that a trend in motion is likely

to stay in that direction until it reverses. Contrast with Behavioral Finance

and Effecient Market Hypothesis.

– History repeats itself. Chart patterns which have been identified and

categorized over the last 100 years reflect pictures that appear in price

charts. These price patterns indicate psychology of the markets which

continues to repeat themselves. The saying is “The past is prologue.”

Types of Charts

• Line Charts [Chapter 11, pages 198-201]

This chart simply connects the closing prices to give us a solid line. Because

most technicians feel that the closing price is the most important bit of

information this type of chart has its place. The line chart sometimes can have

volume.

– daily line chart (Chart 1)

– weekly line chart (Chart 2)

– monthly line chart (Chart 3)

• Bar Charts [Chapter 11, pages 201-205]

The bar chart is the most common form of chart. Its call a bar chart because

each day’s range is represented by a vertical bar which represents the high, the

low, and the close (the close is shown by a horizontal tick to the right on the

bar). Some charts show opening tic by a horizontal tick to the left of the bar.

Volume is usually found at the bottom of the chart on the X axis. The level of

the volume is represented by a bar. The higher the bar the more the activity.

In the case of futures, it would measure the number of contracts traded that

day, week, month, etc.

– daily bar chart (Chart 4)

– weekly bar chart (Chart 5)

– monthly bar chart (Chart 6)

– arithmetic vs. log scales (Chart 7 - 8) [Chapter 11, pages 205-206]

Disney - Daily

StockCharts.com

Chart 1Line Chart of Daily Close for Walt Disney2003 - 2007

Disney - Weekly

StockCharts.com

Chart 2Line Chart of Weekly Close for Walt Disney2003 - 2007

Disney - Monthly

StockCharts.com

Chart 3Line Chart of Monthly Close for Walt Disney2003 - 2007

Krispy Kreme - Daily

StockCharts.com

Chart 4Daily Bar Chart for Krispy KremeJune 1 - August 22, 2007


• Candle Charts [Chapter 11, pages 203-205]

Candle charts are a Japanese version of bar charts and have become very

popular recently. You still have the same information (high, low, close and

open) but the visual presentation differs. On a candle, a thin line (called a

shadow) shows the days price range from high to the low. A wider portion

of the bar (called the real body) indicates the range between the open and the

close. If the close is higher than the open, the real body is white (clear). If the

close is lower than the open, the real body is black. (Charts 9 -11)

• Point & Figure Charts [Chapter 11, pages 207-212]

The third type of chart is the Point & Figure (P&F) chart. These charts are

a series of columns of X’s determined by price fluctuation without regard to

time. An alternative system is a series of alternating columns of X’s and O’s.

The X column show rising price and the O column show declining price.

– Wheelan’s chart

– Examples of P&F charts (Charts 12-15)

Samples of P&F charts with various increments, reversals and some with

moving averages (of columns). (Charts 16-28)

Comparing & Contrasting the Different Chart Styles

• Line chart

– Advantages. Shows closing prices is very simple to read and can simply

show the trend of the instrument your following. It is constructed very

easily and is easy to maintain. The fact is that for a directional answers, this

is the easiest tool to use.

– Disadvantages. Gives very little information. The lack of information can

lead to many mistakes.

• Bar chart

– Advantages. The information is more complete. High, low, close, open

are given which by itself can give you the sense of direction for the period

your following (daily, weekly, monthly etc.). Also is accompanied with

volume and a host of other indicators if so desired. The versatility is the

main advantage of this type of chart.

– Disadvantages. The bar chart is harder to maintain. It is more time

consuming then the line chart if done by hand. Also requires more space for

less information unlike the P&F charts that offer more time in less space.

Chart 8Monthly Bar Chart for Cisco Systems, Inc. (logarithmic scale)

Krispy Kreme - Weekly

StockCharts.com

Chart 5Weekly Bar Chart for Krispy KremeJune 1 - August 22, 2007

Krispy Kreme - Monthly

StockCharts.com

Chart 6Monthly Bar Chart for Krispy KremeJune 1 - August 22, 2007

Chart 7Monthly Bar Chart for Cisco Systems, Inc. (arithmetic scale)


• Candle Charts

– Advantages. The candle chart offers a much more visual format.

The information seems to jump off the pages at you. Because of the

dark and the clear shadings on the charts you can see the distributions and

accumulation patterns.

– Disadvantages. They are harder to calculate and maintain. There are many

patterns that must be studied, like the P&F charts.

• Point and Figure (P&F) Charts

– Advantages. It compresses information. Can give solid buy/sell signals and

they are easy to spot.

– Disadvantages. Like the line charts they have limited information. They do

not use volume or time as a consideration. Another negative is that there are

many patterns that must be studied.

Alternative Styles

1. Market Profile

2. Gann Charts

3. Equivolume

4. Kagi Charts

Drawing the Candle Line

Chart 9Definition of Candle Terms

Chart 11Daily Candle Chart for DIA (Diamonds)September 30, 2007 - January 16, 2008

Krispy Kreme - Daily

StockCharts.com

Chart 10Daily Candlestick Chart for Krispy KremeJune 1 - August 22, 2007

Chart 12Alleghany Technologies, Inc.One point ($1) box and 1 box reversal


Chart 13Alleghany Technologies, Inc.One point ($1) box and 3 box reversal

Chart 14Alleghany Technologies, Inc.Two point ($2) box and 1 box reversal

Chart 15Alleghany Technologies, Inc.Two point ($2) box and 3 box reversal

Chart 17S&P 500 SPDRs (SPY)2 pt/box; 1 box reversal chart - daily


Chart 18S&P 500 SPDRs (SPY)3 pt/box; 1 box reversal chart - dailyly


Chart 20S&P 500 SPDRs (SPY)P&F Pattern: Ascending Triple Top Breakout - Daily

3 pts/box, 1 box reversal chart

-- 10-column moving average-- 20-column moving average

Chart 21S&P 500 SPDRs (SPY)P&F Pattern: Ascending Triple Top Breakout - Daily


-- 10-column moving average-- 20-column moving average-- 50-column moving average



Chart 24street TRACKS Gold Trust Shares (GLD)1 pt/box, 1 box reversal chart

Chart 25street TRACKS Gold Trust Shares (GLD)P&F Pattern: High Pole Warning


Chart 26Citigroup, Inc. (C)P&F Pattern: Quadruple Top Breakout

Average True Range (120) - 1.24 pts/box, 1 box reversal chart

Chart 27United States Oil Fund (USO)Average True Range (120) - 1.68 pts/box, 1 box reversal

Chart 28Goldman Sachs Group, Inc. (GS)P&F Pattern: Ascending Triple Top Breakout - Daily

Average True Range (120) - 5.63 pts/box, 1 box reversal chart


Bollinger Bands




Chart 22S&P 500 SPDRs (SPY)P&F Pattern: High Pole Warning

2 pts/box; 1 box reversal chart - daily



college level introduction to technical analysis history ... · college level introduction to...

Documents