The study and observation of technical analysis begins on chart and there are plenty of charting systems available in today’s market. Selecting the type of chart is one of the most critical decisions for a trader. A trader must be very clear in his objective while selecting the chart as it defines his or her purpose. Charts are the basic and an important tool for a trader because it holds the true data information about the price activity over a certain period of time and rest of the study is based on those represented data. The chart price movement contain
A chart is a visual representation of data, in which the data are represented by in form of symbols, line etc. It is simply a graphical representation of any activity or process on X and Y axis over a certain period of time. In terms of stock market it’s a two dimensional representation of the change in price and turnover or volume of a stock or index. In a view, a chart reflects the price volume behavior on a graph which contains the day to day activity of price movement over a certain period of time.
Computer Based Charting:- While computerized type of charting is certainly not a new system of charting in today’s scenario. If we look around, in today’s situation, there are plenty of charting software vendors and options from whom to choose. All of the charting software vendors almost provide the same basic tools with common objective of making the analyst aware of the price movement and helps them to project its future course of action.
Charting platforms are mainly of two type’s i.e. web based charting system and technical software. Though, both of the computer based charting system depicts the same basic chart that is time volume and price action.
With advancement of technology there are many types of charting system is used in technical analysis beyond convention approach of OHLC, Candlestick or Line chart.
- Line Chart
- Bar Chart
- Candlestick Chart
- OHLC Chart.
- Points & Figure etc…
- Line Chart
A chart pattern is an indication of successive variable stock values over time. In context of stock market a simple line chart draws a line from one closing price to the next closing price. A line graph is generally used to show a change over a period of time. A line graph represents two set of data i.e. Price and Time in context with technical analysis.
Below chart is a example of a line chart with red dots reflecting the closing price of each day.
A bar chart or bar graph is a chart with rectangular bars with lengths proportional to the values that they represent. A bar graph is basically used for comparison purpose. These types of charts are not used for technical analysis. They are basically used to draw some comparison between different entities. In this type of chart only day high can be identified.
Candlestick Chart The Japanese have been using candlesticks since the 17th century to analyze rice prices. Candlesticks were introduced into modern technical analysis by Steve Nison in his book Japanese Candlestick Charting Techniques in 1950. It is bit similar to bar chart in only shape at some extent. It is the most commonly used charting tool primarily the way they represents the price data which becomes so easy for the traders or analyst to draw conclusion on that. A candlestick based charting system overcomes the drawback of line chart and bar chart. It holds the property of line chart and bar chart and also contains the extra information for analysis. It helps in identifying the trend and pattern of the price.
If the close is higher than the open – the candlestick mid-section is hollow or shaded blue/green.
If the open is higher than the close – the candlestick mid-section is filled in or shaded red.
OHLC charts demonstrates the price behavior on any particular time frame at what level the stock opens, made the highest and lowest price that stock made during a particular trading hour, and at what level the price of that stock closes when the market closed each day. OHLC charts can be formed on different time frames during intraday or positional trading such as on 1 min, 3 min 5 min, 15 min etc for intraday and week, month, year, or more for positional trading.
OHLC charts typically consist of a vertical line representing a particular time frame. The base points of the line reflect the lowest price of that particular time frame and the peak indicates the highest price of that particular time frame. The opening level of that stock price is indicates as a line or tick on the left side of the bar with small horizontal way. The small horizontal line or tick on the right hand side of that vertical line reflects the closing price of that stock in a particular time period.
Point & Figure is an easy charting system in technical analysis field and a very conventional method of price projection. Point and Figure follows changes in price which is plotted on basis of X & 0. It works on logical and scientific principles. Point and figure (p&f) charts provide a simple, yet disciplined method of identifying current or emerging trends in stock prices. This brief guide aims to familiarise the investor with the basic concepts behind p&f charts and highlights some of the benefits from using them in one’s investment procedure.
To design a P&F chart, consequently, one should decide first what could be the significant price movement one should need to plot on this type of charting system. For an example, if a trader decides that in case of Nifty that every 10 points movement either side is a significant movement then following situation may arise before plotting the price movement on this type of chart:-
- If whenever the price moves up by 10 points or more a cross will be plotted in the box on the chart above the previous one.
- If it happens like the price rises up on the scale less than 10 points then nothing would be plotted on the chart box.
- If whenever the price goes down by on the scale more than 10 points then a new column of X will start on the right side of the first where 0 columns ends previously and column of Zero/ 0 will stop. This plotting will be called as a reversal.
- Now if, whenever, the price of the stock or index falls below more than 10 points or extra a zero will be plotted in that column. This type of process will keep on repeating until the price starts increasing by more than 10 points.
X-> Increase in Price
0-> Decrease in Price
The balance between buyers and sellers
Point & Figure type of charting helps the traders or analyst to understand the correlation amid supply and demand at special price levels. When demand increases in the market, increases in greater number in relation to supply, prices of the stock tends to move in upward direction and this movement in the price is plotted by a column of Xs on the chart.
On the contrary, Point & Figure type of charting helps the traders or analyst to understand the correlation amid supply and demand at special price levels. When supply increases in the market, increases in greater number in relation to demand, prices of the stock tends to move in downward direction and this movement in the price is plotted by a column of 0’s on the chart.
The main purpose of a Point & Figure chart is to recognize the levels of breakout for trend reversal or trend continuation.
- Irrelevant Fluctuations Eradicated
- No importance to time volume open high low close
- Clear Entry & Exit Level
- Extensive pattern recognition
When we talk about charting system based on computer technology as the tool for investment analysis, websites who provide charting platform services, in broad-spectrum, doesn’t provide the authority and flexibility that helps the trader or analyst to find what they can look into with their application based software counterparts. So here, the basic and foremost question on should ask before selecting the medium of analysis is whether the traders analysis requirements will be taken care by the software or web based charting system for his technical analysis and charting tools.
However, the common things is that traders will find the bunch of technical indicators on web based charting system also but practically speaking they seems to be much weaker than generally what a trader would be able to discover in with technical analysis software. Although, for the past few years things have improved also in this web based charting system but still they lag behind in power. They despite having a bigger collection of technical indicators, a number of the more advanced technical analysis programs on the current market situation today allow traders or its users to create and helps them in managing their own technical indicators by writing code itself for trading purpose. This is one of the biggest flaws which are missing in the web based charting system these days. In addition, most of these application based charting software allows the trader to build the strategy and back test them on their own trading software.
Once more, the above discussed flexibility is again missing in this type online based or web based charting system and they do not have this kind of platform in near future too which gives the trader or analyst an edge over using charting software for back testing and strategy formation. Further, many of the charting software also provide the flexibility to run the market on historical data in video format which is the simulation for the real market. But do not let those differences discussed above as a deterrent for practice things, observing and making the judgment on the basis of the charting software advancement. Online based charting systems also have some individual advantages over the charting software and that is primarily of the data accuracy and timeliness as delivery. Web based charting system is relatively bit faster in real market scenario as compared with charting software.
When someone has to look for its own needs and desire, the trader must look into the objective for the selection of charting system. Weather, the trader is looking for positional trading or intraday trading. Positional and intraday trading will be discussed later. Another important aspect for the trader is to understand his trading style and his acumen for his trading. If the trader is a beginner or novice then web based or online charting system will equally work well for him. Web based services usually provide end-of-day data free of cost and they charge very nominal fees for intraday live market data. Therefore, a trader can begin his or her own analysis without waiting for the data to be downloaded as all the data required by him is easily available on internet or on the domain of chart provider. However, if the trader has certain level of understanding and the maturity of the market and is trading for some time in the market and understand the logic and concepts of the tools then the trader should look for software application and the find out the data feeder according to his own needs.
Technical analysis software in today’s market ranges from few thousand bucks to some few lakhs per annum depending upon the user specific requirement. If you are buying the software from the company and choose to get the data feed from third party vendor then the software may cost very less but if a trader desires that he should get the data from the company from which he has obtained the software then this service will cost him very heavy.
In the end, if a trader who doesn’t wish to generate his own set of indicators or create and back test his methods of trading on charting system software technical trading systems, an online based charting system service should be use as they offers all the facility a trader can look for. Alternatively, if a trader who desires to generate his own set of indicators or create and back tests his methods of trading then he should opt for charting system application software.
Below mentioned are some famous software one can look for his or her trading purpose.
Software:- Metastock, Amibroker, Spider Iris, Falcon, Advance Get etc. All these types of software come in two formats i.e. Online Mode and Offline Mode. In an online mode if a trader buys this kind of software, he will get data also along with the software and it is very expensive for a small or retail trader. In offline mode, if a trader chooses this option, the trader will get a software platform and for data feed he is required to contact third part data feeder vendors.
Categorically there are two types of data feed one is Real time data feed and the other is EOD historical data feed. Real time data feed is used to capture the current market trading price and the historical EOD data feed is used to find out the end of the day activity.
Below are the few quick points for using charting software for technical analysis.
As there are plenty of websites which provides charting tools for technical analysis and they are keep on increasing with time. Below are the few mentioned websites where once can use the charts for practice and learning purpose.