-------------------------------------------------------------------------------

----------------------------------------------

Among the models investors use to buy or sell stocks, perhaps the most visually intuitive is the price and time serieschart, a variety of two-dimensional forms showing price on the vertical dimension and time (or date) on the horizontal dimension. Charts of the price action have a direct and immediate appeal. Even for the untrained observer, they give a sense of the direction of prices. This information is easier to absorb than a list of numbers. But you always have to consider the trend in light of longer price environments.

For the more experienced trader, charts can be important as predictors of future prices. Even with only a bit of chart experience, you can pick out a few of the many patterns, like triangles, wedges, channels, and head and shoulder formations. The patterns occur at any charting time frame, short-term or long-term.

This isn't to say chart reading is infallible. Far from it! It's a bit like reading tea leaves -- too easy to "see" patterns that aren't valid. Chart reading isn't so much being able to make a prediction every day as it is finding a pattern occasionally that gives you confidence about what will happen next.

Patterns tend to develop with three impulses of volume, the time interval between them varying on the size of the pattern: First there is high volume. Then after a time there's a short spurt on lower but still impressive volume. Eventually, after about the length of the first interval, a third spurt on heavy volume pushes prices out of the forming pattern.

Back to Index

---------------------------------------------

One popular chart form is the bar chart, the main part being the price bar -- a vertical line representing the range of prices for a trading time period, the interval specified as the basic trading unit. This interval could be an hour, day, week, month, or some other time interval. A bar spells out the range of prices over the specified interval of time. A bar chart then takes the more definitive shape as a sequence of bars. Each of the bars of the chart shows a range of prices from a low for the period to a high for the period. One might also add the closing price for the period, which could be a dash, usually attached to the right of the bar. The opening price, in turn, could be shown as a dot, or a dash, to the left of the bar.

Price itself can be represented either with a linear or a logarithmic scale. The former shows price changes in terms of equal linear amounts, while the latter provides equal percentage changes. Choosing the best format is an important part of charting. When a percentage move is critical, you need to use a logarithmic measure.

Using the charts effectively is a matter of perception of a price pattern, and if you are too free with your pattern construction, you add another faulty element to your trading strategy. Your impression depends in part on the scale of the chart. And you need to be able to identify percentage price moves.

Back to Index

---------------------------------------------

For a chart to be useful as a trading tool, it has to provide the right kind of information and has to be properly scaled. What makes the scale so important is the sensitivity of price movement to the trading time period. James A Hyerczyk expresses it well:

The Gann format requires a one-one scale for the charts, which calls for an equal number of squares in the grid up and to the right. Gann himself preferred graph paper with eight or twelve grids to the inch. The one-one scale makes it easy to draw 45-degree angles, an important feature of Gann theory.

Back to Index

----------------------------------------------

Top of Page