INTRODUCTION TO PRICE CHARTS

Chart patterns

Technical Analysis is the study of market action for the purpose of forecasting future price trends. The primary working tool is the chart. A chart is a graphical representation of price movement over a specific period of time and is composed (except for a few exceptions) of an x-axis (time) and a y-axis (price). (See Fig. 1)

Figure 1

Line chart

A line chart shows a line connecting the "closing prices". The closing is the last price recorded at the end of a specific period of time (session). (See Fig.2)

Figure 2

Bar chart

The bar chart is composed of a high (highest price during a session), a low (lowest price during a session) and the close. (See Fig.3)

Figure 3

Candlestick chart

The building blocks for the candlestick chart are the high, the low, the opening and the closing. The difference to the bar chart is that the open and the close form the cornerstones for the, so called, real body. The body is white if the closing is higher than the opening. The contrary is true for the black body. (See Fig.4)

The concept of trend

The market moves in trends. The trend is nothing other than the direction in which the market is moving. It consists of a series of successive peaks and troughs. It is actually the direction in which the peaks and troughs are moving that constitutes market trend. Upwards, downwards and sideways ("trend-less" consolidation) are the three basic trend directions.

Trendlines – Up Trendlines

A straight line usually drawn to define an uptrend against or through price bar lows.

Trendlines - Down Trendlines

A straight line usually drawn to define a downtrend against or through price bar highs.

SUPPORT AND RESISTANCE

Support

A horizontal line (floor) which has acted as a barrier to lower prices. Usually defined by two or more price bar lows.

Resistance

A horizontal line (ceiling) which has acted as a barrier to higher prices. Usually defined by two or more price bar highs.

Previous peaks and troughs are considered as resistance, respectively support (figure 5&6).

Figure 5 Figure 6

When the market is pausing in a consolidation (sideways trend), it is squeezed between resistance (top-line) and support (bottom-line - see figure 7). A break beyond one of these lines can be used to initiate a trade. In an upwards channel the bottom-line acts as support whilst the top-line is representing resistance.

Figure 7

As a general rule, in an up-trend the test to a support can be used as a buying opportunity. In a downtrend, on the other hand, a resistance zone is considered as a selling area. Once a resistance or a support is clearly broken, they change their function and become the opposite. A support becomes resistance, a resistance becomes support.

Uptrend Channel

An up-trending price bar pattern in which inclining parallel lines can be drawn through or against price bar highs and lows respectively.

Downtrend Channel

A down-trending price bar pattern in which declining parallel lines can be drawn through or against price bar highs and lows respectively.

Channel-Horizontal or Sideways

A horizontal or "sideways" price bar pattern in which horizontal parallel lines can be drawn through or against price bar highs and lows respectively. Chartists "buy" on a break up and out of the Channel or "sell" on a break down and out of the Channel.