If you have the chance to read the business section of a newspaper, probably you have noticed a line graph that represents the movement of different currency or stock prices for that particular day. If you will try to visit the same business section in the same newspaper, you will notice that the line graph is not the same graph that you have seen yesterday, indicating that there are movements within the market for that day.
Graphs, or called charts (in economic analysis) is a type of graphical representation of tabular numeric data or given functions. It is used to show large data quantities and its relationship between each other and its respective parts in a manner that will be easily understood by readers. In other words, the raw data that usually come into the form of large figures or tabular numeric numbers can be easily expressed in the form of charts.
Although it is used in a wide variety of applications (governance, health services, electricity generation and distribution, and others), charting is commonly used on the economic market, especially in conducting technical analysis. Technical analysis is used to determine the performance of a security within the market (be it a commodity, stock, or any foreign currency) by evaluating its price movement (both past and present) in the market. It also involves the analysis of a security’s volume and open interest in a particular trading day.
Technical analysis primarily involves the study of charts or past price actions (or the movement of a security’s price and volume on a particular trading day). Typically, charts that are used in technical analysis represent the performance of a security on a series of prices over a set of time frame. For instance, a particular chart may show the commodity’s price movement in over a half-year period, wherein each point in the graph corresponds to the closing price for the day the commodity is traded.
There are several things that you should be aware of when looking on charts that are used in technical analysis. These include the information entered to the charts such as the following:
->Time scale- it refers to the time frame that is commonly found on the bottom of the chart, which may differ from seconds to decades. The most commonly used time frames are daily, weekly, quarterly, and annually. Keep in mind that the longer the time frame (annually or by decade), the less the chart shows details. Every data point that you can see in the chart represents the closing price of the security or its low or high price, depending on the chart that you are looking into.
->Price scale- it is typically found on the right hand-side of the chart. It illustrates the security’s present price and compares it to the recorded data points. It can be either constructed in a linear (arithmetic) or logarithmic way.
There are three main types of charts used in technical analysis which is used by traders or investors depending on the information that they look for and their individual skill levels. These are as follows:
->Line chart- it represents the closing price of a particular security over a time frame. A line is formed by connecting data points (which represents the closing prices over a time frame).
->Bar chart- it illustrates the detailed information of line charts by adding several key data pieces to the data point. Such chart is composed of series of vertical lines that represents the low and high for each trading period, together with the closing price. The open and close are shown through the vertical lines with the horizontal dash.
->Candlestick chart- it resembles just like a bar chart, only that it is constructed in a visual manner. It has a thin vertical line that illustrates the trading range within the period. It makes use of different colors to explain the scenarios happened during that trading period.
Charting used in technical analysis is important-it can never be disregarded for every point, line, or bar represented in this chart means either profit or loss for traders and investors.