Science of Trading - part 2

Some tools that are used in technical analysis by technical analysts!

CHARTS

There are three major charts that are popularly used by technical analysts when carrying out technical analysis. These are line charts, candlestick charts & bar charts. The chart of choice will be dependent on the information they want to get as well as the goals they want to accomplish. But, the most important, most effective and most scientific charts are candlestick charts.

Line Charts

To many investors, the closing price will always be of importance as compared to the opening price because it is the determining price of how your trade did. Line charts are excellent at monitoring the closing price of the market over a specified period. The line chart will only show the closing prices. A line chart is arrived at after joining together all the closing prices within the specified timeframe. It is the easiest chart to use when trying to spot trends.

Candlestick charts

Candlestick charts are of Japanese origin with over 100 years of use. These are the most widely used and most useful form of charts. In a candlestick chart, there will be a line running vertically on the chart which shows the price range for a specific timeframe. The line will have different colors, depending on the note on which the stock ended (whether high or low). Wider bars will typically represent the difference between the prices for opening and closing. Candlesticks are of various types and each type provides unique information which helps in identifying the direction of the trend. 

In certain cases, candlesticks provide accurate information about trend reversals. If you properly and sincerely learn about candlesticks, you will find that they are one of the best pictorial depiction of a trend. They are awesome when it comes to identifying trend reversals. The widely used and important candlesticks are Bullish Engulfing, Bearish Engulfing, Hanging Man, Hammer, shooting star, Doji and Morning Star, etc. Noise in Japanese candlesticks in small time frames can be managed by looking at Heikin-Ashi candlesticks also for a better depiction of the trend. Use candlestick patterns with suitable technical indicator and/or oscillator, to get high probability trades.

Bar Charts

Bar charts can be thought of like a sophisticated version of line charts in which they include the open, high, low, and close price ranges. The vertical lines on the chart represent the price range in a specified timeframe while the horizontal dash on the sides represents the opening and closing prices. The opening price is on the left of the horizontal dash while the closing price is on the right of the line.

 Tarun Goyal

(Trainer & Author)