Understanding price charts for effective technical analysis

Technical Analysis for analysing securities and making investment decisions has been one of the most preferred ways of tapping into the pulse of the market. And at the nucleus of this function is the factor of price and price charts that ultimately govern the process of technical analysis.

 

 

 

 

Price Charts are one of the most efficient ways of tracking and inferring price movements, studying supply and demand, and assessing future trends. A typical price chart is depicted on the X-Y scale wherein the x-axis (horizontal axis) represents the time scale and y-axis (vertical axis) represents the price scale.

Apart from the basic Open-high-low-close chart (also known as OHLC charts) where the opening, highest, lowest and closing price of scrip is taken into account, there are three other ways of charting scrip prices.

1. Line Chart or Close price chart: This is the most basic method of plotting prices, representing only the closing prices over a set period of time on an X-Y graph. This type of graphical representation helps discount intraday swings and is useful when open, high and low point data is not available.

2. Bar Chart:

A popular method of plotting prices, Bar Charts take into account high, low and close point data of a stock price for a particular day. The chart is made up of a series of vertical lines, each representing the high, low and closing price of scrip. The opening price is illustrated by a dash on the left side of the vertical bar while the closing price is plotted towards the right. A bar coloured red signifies that the stock value has gone down.

3. Candlestick Chart:

Similar to a bar chart, a candlestick chart (a method of Japanese origin) is only different in terms of its visual construction, representing OHLC data  across a candlestick-like illustration. A candlestick has two parts – the body and its shadow.



The body represents the open and close price of the scrip for the day while the upper and lower regions denote the high and the low price of the day.

 

A candlestick is further categorised into three: A white candlestick which denotes a bullish movement, a black candlestick indicating bearish trend and the ‘Doji’ candlestick that indicates a neutral trend.

Whatever the choice of chart, a representation of such a nature and design is helpful in understanding the emotions in the market by studying the market itself, as opposed to its many components. It also helps an investor plan the entry and exit strategy better. Each price chart comes with its own characteristics, and while data may be same across the board, each illustration presents a different interpretation. It is advisable to try out every method to know which best work for your stock planning; for constantly switching charts will only create confusion.

 

About Kotak Securities:

Kotak Securities is one of India’s leading stock broking firm offering stock trading, mutual fund and IPO investing service’s along with a research division specializing in Sectoral research and Company Specific Equity Research. Express your views on their Facebook Page and Twitter Handle or you canalso browse through their various videos on YouTube and Slide Share.

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