Basic Elements of Charting

Apurva Sheth
I am sure that by now you are comfortable with the basic philosophy behind technical analysis.

One of my readers Mr. Raviraj very aptly summed up this philosophy by commenting on my last article that 'TA is more of reading human psychology on charts'.

Yes! That is exactly what it is - studying crowd behavior in a visual form. And when I write to you about price patterns you will know how patterns that were discovered hundreds of years back are still valid. But you will have to wait a bit for that.

After reading your comments on the last article I am sure all of you are excited to learn more about charts and start trading with the new found knowledge that you have gained. But, let me tell you that I have made far more mistakes than anyone else out of excitement and burnt my fingers. And I don't want you to go through the same pain that I have been through.

So, instead of jumping straight to techniques of trading I will first speak to you about chart construction. To those who are new to this field a basic understanding of chart construction will give you a solid foundation before moving on to higher concepts. For those who are familiar with charting, spending a few minutes to brush up your basics is not a bad deal, huh? Also, don't be disheartened as I will spill out one of my secrets of charting in as soon as the following article. So just hang around.

As I promised in my first article, we start right from the basics. The 2 basic elements that you will find on a technical analyst's chart are: price and volume.

Layout of a Basic Chart
Source: Spider Software India

This is what a basic technical chart looks like. It is ideally divided in two parts.

The upper part is where (1) price data is plotted while the lower half is where (2) indicator is plotted.

In most cases you will find volume plotted below the price.

On the top left corner of the chart you will find the (3) name of the ticker alongside other details like open, high, low, close and % change compared to the previous period.

The (4) price and (5) indicator values are plotted on the Y axis placed on the right hand side.

The (6) Indicator name is visible on the left hand side below the ticker in a new panel.

The (7) date or time are plotted on the X axis.

Also note that the (8) time frame that is chosen for charting price is mentioned at the bottom of the chart alongside X axis in the rightmost corner.

Dly for daily, Wkl for weekly, Mon for monthly.

I hope that was clear. I know it seems like a lot of variables, but once you get a hang of these indicators they will seem as familiar as an old friend.

Now, let me walk you through the various types of charts that are commonly available, and tell you which one is my favourite.

  1. Line Chart
    These are the first charts that we come across in our geometry class at school. They are created by plotting the closing prices of the period selected. For example, on a daily time frame a line will be plotted between the daily closing prices to create a line chart. On a weekly time frame weekly closing prices will be used, on monthly time frame monthly closing prices will be used and so on.

    Nifty line chart since March 2014
    Source: Spider Software India

  2. Bar Chart
    They are also known as OHLC charts. OHLC stands for Open High Low Close respectively. Bar charts show the range of the timeframe selected. For example, on a daily chart every single bar will show that day's range right from high to low.

    Bar charts are normally plotted in black & white but some people, like me, prefer red and green. However, I have rarely used bar charts in my career and prefer candlestick charts over them as these are visually appealing and easier to read.

    Nifty bar chart since March 2014
    Source: Spider Software India

  3. Candlestick Chart
    Japanese rice traders have been using this technique for ages and the western world discovered this technique later in the eighties. Candlesticks are easier to interpret. It gives the same open high low close data that bar charts give but in a much more appealing format.

    Let's look at how a candle is formed.

    Source: wikipedia
    The adjoining figure shows a green bullish candle. It means the closing price is above the opening price on the time frame selected. Mind you, a bullish candle can form even on a day when prices have fallen compared to previous day. The nature of the candle (bullish or bearish) is decided based on today's close with respect to today's open and not today's close with respect to yesterday's close.

    Source: wikipedia
    The adjoining figure shows a red bearish candle. It means the closing price is below the opening price on the time frame selected. A bearish candle can form even on a day when prices have risen compared to previous day. For example: - A bearish candle would form even when the stock may have opened gap up today and closed below today's open but above the previous day's close. In this case the stock has registered gains on a day-on-day basis but the nature of the candle will be considered bearish as it closed below its open.

    Nifty candlestick chart since March 2014
    Source: Spider Software India

    This is a candlestick chart of Nifty since March 2014. You can see that it looks nicer than the other two I have shown above.

    It is also easier to read. Notice the election results day gap up in Nifty when the index opened at 7,270, moved up to the high of 7,563, but ended the day at 7,203. This was a gain of 80 points compared to the previous day's close of 7,123. But, the daily candle was still marked as red in color because the close is below the open.

    Apart from this the candle chart also give details about the day's range which a line chart cannot as it considers only closing prices for plotting. The bar chart adds more depth and value compared to a line chart but the focus is only on the day's range rather than the open and close.

    Thus, for me candlestick charts are clear-cut winners when compared to the other two.

Now, when you see stock charts you will know exactly what to look for. Try reading a few charts to see how it feels, and let me know if you have any questions.

Which charts do you prefer? Share your views in the Club or share your comments here.

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5 Responses to "Basic Elements of Charting"
Sunil Doshi
30 Apr, 2015
Sit ji; I thank u very much for offering free informative guideline & giving opportunity to ask query to great Asadbhai. It will be a unvaluable knowledge for us like thousands of comman people at free of cost who had lost lot of money. Sit hi my question is that apart from your chart & data ref thousands of peoples will take trade but how can be saved from market manuplater who turns the situation against those poor people. This is not fair in such a market. Which I have read in today's Gujarat samachar & got depressed that big invester see the general position & turn opposite to it. A sad Bhai u r doing a noble cause; don't u think that after taking training gr8 u all people will trade & loose there valuable money extracted by market manuplater. Pl. Our noble request to give justify our problem. If your self allow we all Unitedly my nominate u agaist manuplater. Above things does not reflect on chart. Pm advise. Thanking u your s sincerely Sunil doshi Ahmedabad. Like (2)
Apurva Sheth
19 Dec, 2014
@ Sabitava Dhar I will be discussing candlesticks in detail at a later stage and once I do that I am sure you will simply love them & @ kiran will also realise that candlesticks are not only for the professionals but also for the Aam Investor. Like (1)
kiran vinayababu
15 Dec, 2014
To me line chart is simpler and easy to follow. I think candle stick charting is for professional who can interpret easily and read much into the behavior of the market like for example what signifies the length of a candle etcLike (1)
SABITAVA DHAR
08 Dec, 2014
Japanese candle stick chart appeared to be simpler though I do not comprehend fully its usefulness at this stage. Possibly I need to go along with the teachings farther.Like (1)
gowree
06 Dec, 2014
You have forgotten tomention ' point and figure charting' which is the oldest method and we get exat entry and exit points. gowreeLike (3)
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