Fundamentals of Technical Analysis and Algorithmic Trading Chapter 2: Constructing charts

1. DoğuAkdenizÜniversitesi Faculty of Business and Economics Department of Banking and Finance Fundamentals of Technical Analysis and Algorithmic TradingChapter 2: Constructing charts SaeedEbrahimijam Spring 2013 FINA417

2. Contents • Types of charts - Line charts - Bar charts - Japanese Candlestick charting • Arithmetic Versus Logarithmic Scale • Volume Fundamental of Technical Analysis and Algorithmic Trading

3. Charts say us what the stock is really doing in the market. • Whether it is good time to enter the market? • Charts are faster!! Fundamental of Technical Analysis and Algorithmic Trading

4. Line charts Stock Price Time Fundamental of Technical Analysis and Algorithmic Trading

5. Bar charts • Each bar is composed of 4 elements: • Open: the price of the stock when it opens in the beginning of the specific trading period. • High : the highest price of the stock in the specific trading period. • Low : the lowest price of the stock in the specific trading period. • Close: the price of the stock, at the end ofthe specific trading period. Fundamental of Technical Analysis and Algorithmic Trading

6. A sample of Bar chart Fundamental of Technical Analysis and Algorithmic Trading

7. Jappanese Candlestick chart • One Candle stick for each period of time. 1 min, 15 min, 1Hour, daily, weekly, monthly… Doji star Fundamental of Technical Analysis and Algorithmic Trading

8. A sample of Candlestick chart Fundamental of Technical Analysis and Algorithmic Trading

9. Types of candlesticks 1- too much Bearish 2- too much Bullish 3- Bearish 4- Bearish 5- Bullish 6- Bullish 7- Neutral 8- Neutral 9- Bullish in the downtrend, Bearish in the uptrend 10- Bullish in the downtrend, Bearish in the uptrend 11- A turning period 12- A turning period 13- End of downtrend 14- A turning period 15- (possible) turning period Fundamental of Technical Analysis and Algorithmic Trading

10. Candlesticks Bullish Reversal Patterns • Hammer • Bullish engulfing pattern • Tweezerbottom • Piercing line • Morning star • Bullish dojistar • Bullish harami • Bullish haramicross • Bullish meeting lines Fundamental of Technical Analysis and Algorithmic Trading

11. Candlesticks Bearish Reversal Patterns • Hanging man • Bearish engulfing pattern • Tweezertop • Dark cloud cover • Upside gap two crows • Evening star • Bearish dojistar • Shooting star • Bearish harami • Bearish haramicross • Bearish meeting lines Fundamental of Technical Analysis and Algorithmic Trading

12. Candlesticks Continuation Patterns • Window • Upside tasukigap • Rising three methods • Falling three methods • Side-by-side white lines Fundamental of Technical Analysis and Algorithmic Trading

13. Hammer • In a period of time the prices fall down, but at the end of the period prices rises rapidly and close price is near the open price. • The length of down shadow should at least equal to double of candle body. Fundamental of Technical Analysis and Algorithmic Trading

14. Bullish Engulfing Pattern • The size of the black candlestick isn’t that important. The second candlestick, however, should be a long white candlestick which should totally engulf the body of the first black candlestick. • The wider the price range on the up day, and the heavier the trading volume, the more bullish it becomes. The “upside reversal day” takes place when a market opens lower and closes higher the day after a market decline. Fundamental of Technical Analysis and Algorithmic Trading

15. Bullish Tweezerbottom Fundamental of Technical Analysis and Algorithmic Trading

16. Bullish Piercing Line Note: Fundamental of Technical Analysis and Algorithmic Trading

17. Morning Star (Bullish) • develops over three periods. - In the first period, prices close lower than they were when they opened, resulting in a black main body. - In the second period, prices open lower creating a downside gap and close higher after trading in a relatively narrow range (a small main body). - In the third period, prices continue to move higher and close above the midpoint of the first period’s black main body. Fundamental of Technical Analysis and Algorithmic Trading

18. Bullish Doji Star Fundamental of Technical Analysis and Algorithmic Trading

19. Bullish Harami Note: Fundamental of Technical Analysis and Algorithmic Trading

20. Evening Star (Bearish) • They are reversal patterns that can be recognized through these three characteristics: - The first stick is a bullish candle, which is part of a recent uptrend. - The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish. - The third candle acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle. Note: Fundamental of Technical Analysis and Algorithmic Trading

21. Arithmetic vs. logarithmic scale • On an arithmetic scale, an equal distance for each price unit of change is shown on the vertical scale. Thus the distance between 10 and 20 on the vertical scale equals the distance between 20 and 30, 30 and 40, and so on. On a logarithmic scale, the distance between each price unit of change represents an equal percentage of change. For example, the difference between 10 and 20 and 40 and 80 is the same because each represents a 100 percent increase. Fundamental of Technical Analysis and Algorithmic Trading

22. Arithmetic Vs. Logarithmic Fundamental of Technical Analysis and Algorithmic Trading

23. Fundamental of Technical Analysis and Algorithmic Trading

24. Volume • The trade volume is commonly mentioned at the bottom of the charts according to the period of required period of time. • Increase and decrease in the volume will take into consideration in predicting and analysis of price volatility. • In a healthy uptrend, volume bars are generally larger when prices are rising and smaller when prices are falling. In other words, volume is confirming the price trend. Fundamental of Technical Analysis and Algorithmic Trading

25. Fundamental of Technical Analysis and Algorithmic Trading

26. As a general rule of thumb: • “heavier volume should be evident in the direction of the existing trend.” Fundamental of Technical Analysis and Algorithmic Trading

27. It’s generally a good sign when a price rise is confirmed by rising volume as was the case with Barrick Gold at the start of 2008. Heavy downside volume during March 2008, however, warned of a downside correction. Source: StockCharts.com Fundamental of Technical Analysis and Algorithmic Trading