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ET Wealth: Different methods of charting techniques that help buy or sell stocks

In the second part of the new series on technical analysis, we consider charting techniques that help buy or sell stocks.

, ET Bureau|
Last Updated: Jun 18, 2012, 08.33 AM IST
Which are the factors you consider while buying or selling stocks—past record, valuation ratios, company’s prospects? While these are the identifiers used mostly by retail investors, technical analysts take these decisions based on the price and volume charts.

This is the reason such an analysis is also known as ‘visual investing’. Let us consider the charting techniques that are used most commonly.

Line chart: This is the simplest form of charting and is done with the help of closing prices only, that is, the dates are plotted along the X-axis and closing prices along the Y-axis. Why do they consider only the closing prices? To understand this, one should know what goes on in the stock market on a daily basis.

Every day, there is a tug of war in the market between bulls, who try to push the prices up, and the bears, who try to pull them down. At closing time, there is a clear winner for the day and the closing price indicates the winner—bulls or bears. In other words, closing price is assumed to be the consensus value arrived at by the market for a particular stock after a day’s gyrations.

Bar chart: Though the closing price is the most important data point in a day, it is not fair to ignore the others, such as price highs and lows spurred by extreme greed or fear. So, if you want to capture more data points during the day, you need to go for bar charts. Traditionally, technical analysts use three data points—high, low and closing—for making bar charts.

ET Wealth: Different methods of charting techniques that help buy or sell stocks

As evident from the chart, the upper end of the bar represents the highest price on that day, the lower end shows the lowest price, and the small line on the right side of the bar represents the closing price. Most technical analysts have also started using the opening price and it can be plotted as a small line on the left side of the bar.

Candlestick chart: This is plotted with four data points—opening, high, low and closing. It differs from a bar chart in the way these data points are plotted. The portion between the opening and closing is marked as a thick line (body of candle), and the remaining parts as thin lines (shadows, wicks, tails, etc). This is because the relationship between the opening price and closing price explains a lot about the action during the day. If the closing price is higher than the opening price, it hints at the strength of the bulls, and the body is marked white.

Similarly, if the former is lower than the latter, it reflects the strength of the bears, and hence, the body is marked black. To make the chart visually more appealing, several technical charting programmes now plot these in green and red, instead of white and black, respectively.
ET Wealth: Different methods of charting techniques that help buy or sell stocks

While there are several other charting techniques (Point and figure, Kagi, Renko, etc), these are more complicated and not used frequently.

Time-wise charts: All the above-mentioned charts can be plotted for different time periods (minute-wise, hourly, daily, weekly, quarterly, monthly, annual). This is done according to the requirement of the trader, that is, to identify the trends for different time periods. For example, a day trader, who squares off his position on the same day, will use intra-day charts.

These give more detailed patterns to help identify the turning points during the day, and is akin to using a microscope to look at the market. If the investor is a medium-term player, he can easily manage it with the help of daily charts that stretch up to one year, and is similar to viewing it with the naked eye. However, long-term investors need market direction for much longer periods and use the weekly/monthly charts with data points for at least a few years. This is like looking at the data through a telescope.

Charting facility: Can investors plot the charts manually or will they have to buy costly software to plot them? Several sites, such as Yahoo Finance and Google Finance, provide this online facility free of cost. The Indian stock exchanges (BSE, NSE) also offer this option on their sites. You can plot all kinds of charts, including intra-day and historical, and can plot several indicators and patterns. Once you learn the tricks with the help of these sites, you can consider buying more sophisticated charting software, many of which are available for nearly Rs 10,000 per annum.

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