PDSnet Online Investment Course

Module Name Category Publish

Please change all images to the following format: <figure class="figure"><img src="..." class="figure-img img-fluid"><figcaption class="figure-caption">A caption...</figcaption></figure> (images in current articles are already changed)

Your software offers various different ways to display the end-of-day data which comes out of the share market each day for listed shares, and other securities. Each trading day, the share market produces five important pieces of information for each listed share:
 
<ol>
<li>The opening price (also called the “open”) – which is the price of the first trade of the day for that share.</li>
<li>The closing price (also called the “close) – which is the price at which the last trade took place during the day.</li>
<li>The high (also called the “hi”) – which is the highest price which the share reached during the day.</li>
<li>The low (also called the “lo”) – which is the lowest price which the share reached during the day.</li>
<li>The volume – which is the number of shares which changed hands in all the trades on that share during the day.</li>
</ol>
 
In this lecture module we will discuss the most important of the charting styles available on your software for displaying this information.
 
THE LINE CHART
 
Line charts are the ones which you will be familiar with from your school days. They simply show the closing price for the share on each trading day. The price is measured on the Y-axis and the date along the X-axis. The volume traded is shown as a histogram at the bottom, below the price chart. Consider this chart:
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_line.png" alt="" />
<figcaption class="figure-caption">Line Chart by ShareFriend Pro</figcaption>
</figure>
 
You should also know that if a weekday is a public holiday when the share does not trade, your software will simply repeat the price of the day before. This is a standard which we adhere to in all our charting styles and also with data streams that we get from overseas like the S&P500 index of Wall Street and so on.
 
You can add all sorts of indicators and other analytical tools to line charts and other types of charts. Those analytical tools include trendlines, moving averages, text blocks, arrows, and a host of “technical indicators” which we will explain in later modules.
 
THE BAR CHART
 
Bar charts are one of the earliest technical analysis tools.
 
Bar charts are good for the interpretation of formations, for looking at the price/volume pattern, and for drawing trend lines. Most analysts begin their technical analysis by looking at either a bar chart or a candlestick chart (which will be explained later) and then progress to more sophisticated indicators.
 
As indicated earlier, all charting starts, essentially, with five pieces of information for each trading day for each share – the high, low, open, close and volume. Combinations of these five are massaged mathematically into a variety of different complex forms, but only the bar chart and the candlestick show these points together in a simple format that can be easily interpreted and studied.
 
We believe that before you get carried away with complicated mathematical techniques, you should spend a considerable amount of time looking at what actually happened – there is always time enough to look at a stochastic or RSI later.
 
A bar chart is very simple to draw and to understand. It consists of plotting the high and low for each day as the top and bottom of a vertical bar, and then adding the close and open as horizontal “ticks” (to the left and right respectively) on that “bar”.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_bar.png" alt="" />
<figcaption class="figure-caption">Bar Chart by ShareFriend Pro</figcaption>
</figure>
 
Consider the chart above. You will see that the vertical bars are coloured either green or red. The green bars signify a trading day on which the share has closed (the right horizontal tick) above its opening price (the left horizontal tick) and the red bars indicate the opposite. The top and bottom of the bar show the highest and lowest prices that the share reached during the day.
 
The following is an extract of 12 trading days taken from the lowest point on chart above:
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_blowupbar.png" alt="" />
<figcaption class="figure-caption">Bar Chart</figcaption>
</figure>
 
You can see that the red bar on the extreme left has a large gap between its open for the day (the left-hand “tick”) and its close (the right-hand “tick”) resulting in a red bar. On the second day, the open is again higher than the close – again resulting in a red bar. The difference is that on that day the share traded well above the open (giving an “upper shadow”) and well below the close (giving a “lower shadow”). On the third day, the share closes just slightly above its open – so the candle is green, but you will note that there was a long “downward shadow” meaning that the bears were able to take the price down but could not hold it at those lower levels. And so on. The individual bars show the market action for the day, including the range of trade. 
You will immediately see that this type of graph looks very different from a simple line graph of closing prices over the same period and it provides you with an enormous amount of information about what actually took place during the day, especially when you combine it with a volume traded histogram. 
Very often, it is possible to identify support and resistance lines on a bar chart which are not apparent from a closing price chart – because it only shows the daily closes. Furthermore, the position of the close in relation to the high and low for the day becomes significant. For example, when a share closes at its high then it is generally a bullish sign and vice versa.
 
Most standard charting indicators (such as oscillators and momentum charts) ignore the open, high, and low of the day and use only the close and volume in their algorithms.
 
Bar charts are particularly useful for identifying the day that a change in the direction of a trend occurs. Typically, at the end of a long downward or upward trend there is a “key reversal day”. This is a day which is characterised by a substantial trading range, much larger than usual (about twice the usual size) where the share closes towards the direction of the new trend.
 
CANDLESTICKS
 
Now consider exactly the same chart as a “candlestick” chart:
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_candles.png" alt="" />
<figcaption class="figure-caption">Candlestick Chart by ShareFriend Pro</figcaption>
</figure>
 
The only difference between a bar chart and a candlestick chart is that the period between the open and close (known as the “body”) is not just a line (as it is in the bar chart) but takes the form of a “candle”.
 
To understand the differences between candles and bars, consider also the same 12 days at the lowest point on that chart in a candlestick.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_blowupcandle.png" alt="" />
<figcaption class="figure-caption">Candlestick Chart</figcaption>
</figure>
 
Here you can see that the first day’s candle is similar to the first day’s bar, except that the space between the open and close is made thicker in what is known as the “body” of the candle. In the case of the first day, it is red because the close is lower than the open. So, a candle stick chart is the same as a bar chart except that the distance between the open and close is shown as a body and the range above and below that body are called “shadows”. Thus, there can be an upper shadow and a lower shadow. 
 
CANDLE VOLUME
 
The only difference between a candle volume and a normal candlestick is that the candle volume adjusts the width of the candle bodies to reflect the volume traded on that day. Thus, on days when the volume is heavy, the body of the candle is much wider and vice versa:
 
Using exactly the same chart, consider the candle volume style:
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_volumecandle.png" alt="" />
<figcaption class="figure-caption">Candle Volume Chart by ShareFriend Pro</figcaption>
</figure>
 
You can see here that in this style, some of the candles are much fatter – indicating days when the volume traded was greater. You can see volume associated with those “fat” days on the volume histogram at the bottom of the chart. You will also notice that because of the width of those candles, there are gaps in the X-axis and the volume histogram in this style when the volume is at its greatest. These distortions make it difficult to use conventional technical tools like trendlines. The effect of candle volume can be more clearly seen in the following enlarged extract:
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_blowupcandlevolume.png" alt="" />
<figcaption class="figure-caption">Candle Volume</figcaption>
</figure>
 
EQUIVOLUME
 
The equivolume chart is similar to candle volume except that it uses the high and low rather than the open and close to give the upper and lower limits of the box. The width of the box is determined by the volume as with candle volume charts, and the colour of the box is determined by whether the share closes above or below its open – in exactly the same way as candlestick charts.
 
So, looking at exactly the same period as shown in the candle-volume chart above the equivolume looks like this:
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod19_equivolume.png" alt="" />
<figcaption class="figure-caption">Equivolume Chart by ShareFriend Pro</figcaption>
</figure>
 
So, the main difference is that there are no upper tails and lower tails on the boxes.
 
Which of these various charting styles you use is entirely up to you. They each have their advantages and disadvantages as far as displaying the data from the market is concerned.