Technical analysis is done mainly on the basis of a graph showing the evolution of the price with respect to a certain period of time. In the graph, the vertical axis represents the scale of the quote, while the horizontal axis represents the time.
Technical Analysis Charts: Properties
There are several aspects that we must take into account in a graph and that can influence the information provided. These include the time period and the contribution scale used.
Each bar, candle or point on a chart contains information regarding a given time interval. The duration of this interval is the chart interval.
The decision on which chart interval to use depends on your style of trading with the values â€‹â€‹and the time frame of the investment. For those investors that operate in intraday, it is advisable to use graphical intervals of up to only one minute; While operators who maintain their investments for periods ranging from several days to a couple of weeks usually use intervals ranging from several hours to one day.
Scale of Price Quotes
Two of the most often used charts are arithmetic and logarithmic:
On an arithmetic quotation scale, each price point is separated by the same vertical distance regardless of the price. Each unit of measurement is the same throughout the scale. Let us imagine that a price goes up from 10 to 100 over a period of 6 months. The movement of 10 to 20 (a variation of + 100%) has the same distance as a movement of 90 to 100 (variation of + 11%).
Although this movement is the same in absolute terms, it is not in percentage terms.
On a logarithmic scale, each price point is separated by a vertical distance that is equivalent in percentage terms. A rise of 20 to 40 would represent an increase of 100%. A rise of 40 to 80 would also be 100%. These rises would be displayed with the same vertical distance on a logarithmic scale.
Types of graphs in technical analysis
There are three types of major technical analysis charts that are used by traders based on the information they are looking for. The types of graphs are: line graph, bar graph and Japanese candles.
Types of graphs in technical analysis: Linear graph
The linear graph is the most basic type of technical analysis chart. The line you see in the chart connects particular prices over a specific period of time. The most popular linear graph is the daily chart. Although you could plot any point of the day, most traders focus on the closing price, which is considered the most important. However, this presents an immediate problem: using a daily chart, you can not see the activity of the price movements for the rest of the day.
- Advantages: A linear graph gives the trader a relatively good idea of â€‹â€‹where the value trades have moved for a given period of time.
Types of Charts in Technical Analysis: Bar Chart
Each vertical bar represents a period of activity of the price movements of a given time period, which can range from one minute for daily charts to several years for historical charts. In a daily chart, the vertical bar represents the activity of a day and you can see that the:
- The top of the bar represents the maximum market price
- The bottom bar represents the minimum
- The line on the left of the bar indicates the opening price
- The line to the right of the bar indicates the closing price
Advantages: Through the inclusion of aperture, maximum, minimum and closing information, bar graphs provide a more detailed analysis than usual linear graphs.
Types of Charts in Technical Analysis: Candle Chart
This chart is similar to bar charts since it also represents the four main price points: maximum, minimum, opening and closing. Each candle represents a period of time that can be chosen from the following (according to the graphics program): 1 min, 15 min, 30 min, 1 hour, 2 hours, 4 hours, 8 hours, daily, weekly and monthly.
On a daily chart, each candle represents a day of activity and is shown as either “open” or “closed”:
- An “open” candle represents a closing price higher than the opening price and is shown in blue or green.
- A “closed” candle represents a closing price lower than the opening price and is shown red or black.
- Each candle consists of two components, the body and the shadows:
The body is the thick part of the sail and represents the opening and closing prices.
The fine lines above and below the body are the shadows and represent the extremes of the trading session. The upper shadow (above the actual body) measures the maximum session price and the lower shadow (below the actual body) measures the minimum session price.
Advantages: This is the graph most commonly used in technical analysis. Most trading strategies are based on candle chart figures.