The price chart is a powerful analytical tool. A professional trader needs only to look at it to understand the balance of power in the market. Charts convey the market history of the competition between buyers and sellers for market dominance. Each transaction turns into losses for someone, income for someone and leaves a trace in the form of a dot on the chart.
Attention! The chart primarily captures the emotions (greed and fear, hope and despair) of people trading in the market.
Market history, like any other, also repeats itself – repeating figures and formations appear on the charts. By studying them, patterns are found in the movement of the share price, and with a greater share
probability, you can predict the price direction vector.
Charts show the change in the price of a stock over many discrete periods, of different duration – a day, an hour or several minutes, for example 5. Accordingly, such charts will be called daily, hourly and five-minute.
Traders currently use three ways to chart prices. These are line charts, Japanese candlesticks (Candlesticks or Eastern charts) and segments (Bars or Western charts).
line graph is a simple line connecting several points. Each dot represents the stock price at the end of the period.
Candlesticks and Bars provide additional information about the price behavior during the period.
For each period on these charts, we can see the following parameters:
• period opening price (open);
• closing price of the period (close);
• the maximum price of the period (high);
• the minimum price of the period (low).
Figures 1 and 2 show how these parameters are displayed on various types of graphs.
On the eastern charts, each price period is depicted as a candle (Candle), “main body” and “wicks” (bottom and top). If, during the period, the share price has fallen, the body of the candle is black (see Fig. 2) and white, if it has risen (see Fig. 1). The upper and lower points of the wicks show the maximum and minimum prices of this period.
With this price display, a certain type of figure often appears on the charts. In the Eastern method of technical analysis, they are of particular importance.
Here are the most important ones:
— Doji, (see fig. 3). A figure in which the main body of the candlestick is practically absent. The opening price is very close to the closing price. Wicks are symmetrical or not.
– spinning top, (see Fig. 4). A candle with a very small body and short symmetrical wicks. The main body can be white or black.
– Hammer or hanging man, (see Fig. 5). A candle with a very long lower wick and no or very short upper wick. The body of the candle is white or black. It is called a hammer when it appears at the end of a downtrend and a hangman when it appears at the end of an uptrend.
— Star, (see Fig. 6). Candle with a very small body, black or white. The main feature is that the main body of the star is outside the main body of the previous candle. It is called morning when it appears at the end of a downtrend, and falling when it appears at the end of an uptrend.
— Harami, (see Fig. 7). A construction consisting of two candles, one of which is the top and is completely (body and wicks) within the main body of the other candle.
Important! Eastern charts are focused on opening and closing prices. Therefore, their predictive power is most fully manifested on the daily charts, where each candle represents the price change in one day. The beginning and end of a trading day in a stock is the time when big sellers and buyers appear. They move the price up or down. Their struggle determines the long-term direction of the stock. Candlesticks can also be used for minute charts, but in this
case, most of the figures and constructions will lose their meaning. The beginning and end of the period will be random, because. depends on the chosen time scale. A large white candle on a five-minute chart can turn into a small black candle on a ten-minute chart and vice versa. For the analysis of charts with minute intervals, segments (Bar Charts) are most suitable.
Western charts are focused on the range of price changes for a selected period of time. Often the bars indicating the opening and closing prices are very small. With this method of displaying prices, graphical constructions consist of many segments. The most important of these are trend lines and support and resistance levels.
The share price is rising. If you draw an imaginary line through local highs or lows, it will rise (from left to right).
The share price falls. If you draw an imaginary line through local highs or lows, it will go down (from left to right).
The share price several times drops to some local level and rebounds from it. An imaginary horizontal line can be drawn through this minimum.
The stock price rises several times to some local level and rebounds from it. An imaginary horizontal line can be drawn through this maximum.
Price Corridor – Range
The stock price fluctuates in a corridor, which is formed by imaginary horizontal lines of support and resistance. There is no trend. Sometimes called a sideways trend.
Support and resistance lines – the basis of technical analysis for Western charts.
Most of the complex patterns and patterns in Western charts are built as combinations of support and resistance lines. Trend lines are the same lines, only slanted.
These imaginary lines are so important because they reflect the mood of sellers and buyers in a simple and accessible way. For example, a resistance line passes through local price highs. Above this line, the activity of buyers is greatly weakened. They refuse to buy the stock at higher prices. And higher prices attract sellers who are willing to sell the stock at a good price.
Support and resistance lines tend to cross into each other.
If a stock breaks a resistance level (price rises above it), it often becomes a support level. The same is true for uptrend and downtrend lines.
The main continuation patterns in Western charts are triangles and flags.
The price of a stock moves between support and resistance lines that are slanted towards each other. Their intersection (the top of the triangle) indicates a point in the future, from where a return to the previous trend can occur.
The price of a stock moves between imaginary tilted parallel support and resistance lines. When one of the lines is broken, the previous trend returns.
The appearance of reversal patterns on the “Western” charts indicates the end of the existing trend, and the beginning of the opposite one.
“V” – top
The share price, having reached a local maximum, changes the trend to the opposite one.
The “V” model works similarly – bottom (local minimum).
Note: a stronger signal for a reversal is the situation when the “V” – top or “V” – bottom will repeat in a short period of time. This formation is called a Double Top or Double Bottom.
Head and shoulders
The most popular reversal pattern is Head and Shoulders. The figure shows its appearance for an uptrend. The central peak (head) separates the two peaks (shoulders). An imaginary line drawn through the bottom of the right and left shoulder is called the neck line. This is a local support level, the breakdown of which is a good sell signal. A head and shoulders pattern can look like a triple top when the tops of the head and shoulders are almost at the same level.
A breakout of the neck in an inverse Head and Shoulders pattern signals a transition from falling to rising stock prices. In this case, the neck line acts as a local resistance level.
The validity of the transaction is enhanced if the graphical signals are supported by a change in the dynamics of the volume of trade.
It is much better when the stock price breaks the resistance level with a sharp increase in trading volume.
It is very important to learn how to quickly assess the potential for profit and loss in a stock. Conventionally, graphics are divided into several categories – thick, thin, slow, fast, smooth, crazy and dead. Each has its own level of risk and potential for profit, which requires appropriate trading styles and techniques. Let’s look at these categories.
fat share – trading volume is above 2-3 million per day. The disadvantage is that it is not possible to trade these shares using the tape, quotes and the book of a specialist, because. most buyers and sellers hide their real orders. Fat stocks trade only on the charts, using support and resistance lines as entry and exit points.
Advantage – you can take a big position.
thin share – trading volume less than 150 thousand per day. In stocks, as a rule, a very large Spread. It is difficult to open and close a position. Slippage is a major problem. Advantage – when an aggressive buyer or seller appears, the price of the stock can change dramatically.
Dead share – average daily range of price fluctuations of 25-30 cents and less. Potential earnings in the stock are minimal and comparable to possible losses. There is no point in trading.
Quick promotion – the price changes in jumps, in 1-2 minutes and significantly. Trading these stocks requires skill and quick response. The earning potential is good, but the risk of loss is also high. When a fast stock is trading, all attention has to be given only to it.
smooth promotion – the price change proceeds smoothly, without jumps and sharp reversals. The action is convenient for trading. In it, you can take a big position and get a good profit.
Slow share – share price change is slow. Transactions are made on almost every cent. Profit potential is low. The risk of loss is usually tiny. Stocks allow you to trade several pieces at the same time, they are preferred for beginner traders.
Crazy Promotion – the temper is unpredictable, there are often sharp, huge price jumps both in one direction and in the other. Even on a 1-minute chart, individual segments reach 30-50 cents or more. If there have been such spikes before, especially when they occur on low volume, the stock should be left alone. Similar price behavior can be repeated. Such stocks are not good for trading.
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