The line above the body (Open –Close box) is called the upper shadow (hair) and the line below the body (Open –Close box) is called the lower shadow (tail).
Notice on the second day the Open and Low are same and thus there is no lower shadow (tail) of the candlestick.
The body of candlestick is Solid (Black) when OPEN > CLOSE i.e. CLOSE IS LESS THAN OPEN and the body of the candlestick is Hollow (White) when CLOSE > OPEN i.e. CLOSE IS MORE HIGHER THEN OPEN.
Thus Day 2 has Hollow (White) body, as the close is higher than the open. Day 1 and Day 3 have Solid (Black) bodies, as the close is lower than the open.
The Nifty candlestick chart for period of Nov, Dec and Jan 2005 is shown below. Today’s close
was higher than open and thus today’s candlestick has a white (hollow) body.
Candlestick charting is a very popular and useful charting system. Different candlestick chart patterns are very useful to traders. Candlesticks will be discussed in depth, in later articles.
Time Frames: All the above discussion is done on basis of daily charts. But charts can be made of any time frame.
We can have Daily, Weekly, Monthly, Quarterly, Yearly… charts. Also short-term traders use Intra day charts, which may be Tick-by-tick, 1 Min, 5 Min etc.
To get a chart of any time frame, all we need is the O, H, L, and C of the period. If we want a weekly chart we need O, H, L, and C of all weeks and if we want 5 Min charts, we need O, H, L, and C of every 5-minute period in a day.
Volume: The quantity of shares traded in a stock is known as volume of the stock. Vertical lines usually represent the volume in any particular stock and these are drawn below each day (bar/candlestick).
Given Below is Dr Reddy’s daily chart. The red bars represent the volume.
Note today’s volume was abnormally high at BSE due to a block trade that took place at BSE.
Price Scales - Arithmetic and Logarithmic:
There are two types of price scales used by chartists.
First is the simple or arithmetic scale. All of you must have used a simple graph paper. The scale of Y-axis is arithmetic in nature.
E.g. 1 cm = RS. 10
The second kind is the logarithmic scale. Students of engineering will be well versed with such a scale.
In such a scale price is measured in term of percentage and not in absolute value.
Lets say a price moves from RS 10 to RS 20. For those who bought at 10, their stock has gained 100%. Now suppose the stock moves from 20 to 30. The stock has also moved RS 10 this time. But in percentage terms it has only gained 50%.
The logarithmic price scale measures the percentage moves in stocks and not the absolute moves.
See the charts below –
The first chart is BSE Sens*x from 1970 to 2004 Quarterly chart. The price scale used (Y- AXIS) is a simple scale.
On seeing this chart, what do you feel?
Most of you will feel that the index has become more volatile in the recent years.
BUT THAT IS NOT THE CASE.
Look at the second chart.
In this chart the price scale used is a logarithmic one.
The three blue lines represent 500 1000 and 2000. In the first chart distance between 2000 and 1000 is twice that of the distance between 500 and 1000.
But in the second chart the distances are same.
That is because 2000 is 200% of 1000 and 1000 is 200% of 500.
NOW YOU KNOW WHAT IS MEANT BY MEASUREING PRICES IN PERCENTAGE.
Nowadays log scale has become much more popular than the simple scale. The reason is obvious – PRICES MOVE IN PERCENTAGES.
Even the exchanges impose upper and lower circuits at 20% and not 20 or 2 rupees.
Using a log scale also makes it easier to see price patterns easily.
I recommend that everyone should use a log scale for price; I will also be using a log scale in all my articles.
Support and Resistance:
What is a support and what is a resistance?
A Support is a price level at which collective buying (actual or potential) from market participants halts a downtrend in prices for an appreciable period.
Similarly a resistance is a price level at which collective selling (actual or potential) from market participants halts an up trend in prices for an appreciable period.
We will focus out attention on supports (resistances are exactly opposite case.)
Think of a stock moving up. Stocks don’t move up in a single line. Most move up in zigzag fashion - rising and falling alternately.
Take the example of Tata Teleservices.
It moved from 20 to 35 in almost a single move. Many people noticed it but a few actually were able to buy.
So what happens now?
People want to get in, but also want lower prices. As the people who had got in earlier start selling and profit booking, those waiting for lower prices start buying and slowly the selling gets absorbed.
THUS IN THIS CASE SELLING GOT ABSORBED AT AROUND 30, WHICH IS A ROUND FIGURE – MANY PEOPLE WERE WILLING TO BUY AT 30 AND HALT THE DOWNTREND. THE STOCK BOUNCED BACK AND TOUCHED 33.
So how does a Technical Analyst determine a good support level?
There are many levels where support can be expected –
Historical Highs and Lows
Round Figures
Trend lines
Pattern Targets
Moving Averages and so on.
IT IS NOT DIFFICULT TO FIND 100s of SUPPORTS FOR A STOCK –WHAT IS IMPORTANT IS TO PREDICT WHICH SUPPORT WILL HOLD AND WHICH WONT AND THIS IS WHAT SEPARATES AN AMATEUR CHARTIST FROM A SEASONED TECHNICAL ANALYST.
Role reversal of Resistance and Support:
One of the most fascinating aspects of Technical Analysis is how Supports and Resistances reverse their roles.
Consider a stock stuck between 15 and 20. People observe it for a few days. Then every time it comes near 20 people sell it and when it comes close to 15 they buy it.
Then one day the stock goes above 20.
Day traders are forced to cover – taking prices higher. Now as it is above 20 people start buying. But those who had sold out at 20 regret their decision. THEY THINK I WILL BUY IT IF IT COME TO THE PRICE I SOLD.
This mentality makes 20 a good support for the next correction.
Look at the above chart.
Between January and June 2004 Bharat Rasayan failed to cross 27- 28.
Finally in September it managed to go above 29.
Short-term traders jumped in taking the stock to 45 within days.
Then a correction began.
When the stock came to 29 the EARLIER RESISTANCE LEVEL NOW BECAME THE
SUPPORT.
Similarly trend lines show conversion of Resistances and Supports. The stock took support at 50 just above it’s earlier resistance trend line
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