One thing you will have to do with technical analysis is look at lots of charts. It doesn’t matter whether you are trading or spread betting indices, stocks, Forex or anything else, you can always reduce it to a chart of price going upwards, and time going horizontally. However, we live in a great time with easy access to fast computers that will do all the drawing for you. If you’re already familiar with charts, you might want to skip through this chapter, but make sure you don’t miss anything.
Back in the previous chapter, we looked at a chart of the FTSE 100. Here it is again, for easy reference.
All charts start off in a similar way. The price goes up the left-hand side, and the timescale along the bottom. The top part of this chart is a line that shows the different prices on different days, and the bottom chart with vertical bars shows the volume of trading. You won’t always have the volume on a chart, but it is very useful as you will find out.
The first section of this chart you can see goes strongly upwards, so might be called an uptrend. In the next chapter we’ll look at what precisely an uptrend is, according to technical analysis. Note that the price went up and down quite a bit, even though the general movement was upwards. This is typical, you won’t find a price that goes straight up.
When a price makes new high then comes down, we call it a peak. The opposite case, when the price comes down to a new low and goes up, such as in February above, is a trough. On the right you have a succession of peaks and troughs.
Below the main chart you can see the bar chart of the trading volume. Again the amount is on the left, and as you can see goes up to 3000 “M’s”, that’s simply short for millions – so the peak amount is nearly 3,000,000,000 in one day. This chart actually colours the bars in red for a down day, and black for an upday.
Note that this is a daily chart, which is a bar for each trading day, just five bars for the week. They don’t leave gaps for the weekends, so the next Monday is right next to the Friday.
This is a chart of the FTSE 100, and you can chart prices for virtually anything else in exactly the same way. It gives you basic information and is the kind of chart that Dow would have been looking at, though he would have drawn it by hand. It shows market action, that is price and volume.
It is possible and advisable to look at the market in more depth. Certainly, the chart shows price and volume which is all we said we know about the market when we talked about technical analysis, but there is more information readily available. For instance, when the stock market opens in the morning the shares sell for certain price, during the day they may sell for more or less, and at the end of the day the last transaction may be yet another price. All these transactions are recorded and give us more information about the sympathies of the market. The line charts typically only shows us the end of day, or closing price.
Technical analysts usually look at four pieces of price information, the opening price, the closing price, the highest price reached during the day, or trading period if not a day, and the lowest price. That doesn’t mean there are always four different prices each day. If the price increases all through the day, then the opening price will be the same as the lowest, and the closing price may be the highest. That said, the most usual day will have a high price, a low price, and the opening and closing prices will be in-between.