Charts come in many shapes and sizes. They can be daily, weekly or monthly. They may be plotted on a semi-logarithmic scale, which shows share price or index movements in percentage terms, putting them in scaled perspective. Alternatively, charts may be plotted on the arithmetic, or linear, scale, which emphasizes absolute share price movements, and so presents a more sensitive picture, which is useful if the price range tends to move only slightly.
You may find volume displayed at the bottom of charts in the form of vertical bars, or in a separate chart. The display is usually on a relative adjusted volume basis, with the bottom of the bars showing the lowest volume traded, rather than none, which makes it easy to detect uncharacteristic trends.

Because charts are widely available in computerized form, you do not need to plot them by hand but some technical analysts prefer this longer route because it keeps them focused on the detail.

The most widely used types of chart are the line chart, the bar chart, Japanese candlesticks, and the point-and-figure chart. Let us look at each.

Line chart
The line chart is useful for charting long-term trends. It has a line that plots price on the Y axis against time on the X axis over a period of your choice, whether five minutes or a week.

The closing mid-price is typically used. It eliminates the noise of intra-day share price volatility, which arises in the bar chart. On the line chart, it is easier to spot trend changes.

Bar chart
This gives the technician more detailed information than a line chart. The share price is similarly plotted against time. For each time period, a bar is drawn, the top of which represents the high during the period, and the bottom the low. On the left of the bar, a tick shows the opening price and, on the right, a tick shows the closing price.

The bar chart can appear cluttered, but charting software enables you to zoom in on a part of it. The scale is most often arithmetic.

Candlesticks
The Japanese were using candlesticks, also known as candles, more than 100 years before technical analysis started in the United States. It is only recently that they have become popular in the West. This is largely thanks to candlesticks guru Steven Nison, who has published pioneering books on the subject.

The candlestick, as it appears on the chart, is based round a vertical line that extends from the high to the low of the share price (or of any other instrument used) over the given period, which is usually a day. One horizontal line crosses this vertical line at the stock’s opening price, and another crosses it at the closing price, making a vertical rectangle which, in candlesticks terminology, is the real body.

If the price at close was higher than at opening, the real body is white and, if the price was lower, the real body is black. There may be shadows, which are vertical lines above or below the real body. The straight line above it is the upper shadow and that below it the lower shadow. The shadows represent any price action that extended beyond the opening or closing price.

The contrast of black with white provides visual power, and the patterns often have graphic names, such as Hammer or Morning Star or, in Japanese, Harami, which means pregnant woman (or body within).

Candlesticks, unlike bar charts, are usable only when an opening share price is available because they focus on its relationship with the closing price. They do not indicate the likely extent of a turn and so are not used by technicians to set price targets. Candlesticks give more priority to reversal than continuation signals, and signal a reversal faster than Western trend analysis or moving averages (see Day 10). They traditionally ignore volume and trend lines, although the software is incorporating these as innovations.

Given the profile, candlesticks are best used for examining share price movements over a short period, which is useful for traders but not so much for medium- to long-term investors.

Not everybody is convinced about candlesticks. Many years ago, when I was a student on courses run by the Society of Technical Analysts, I encountered some high-level feeling against the concept, and I know of one candlesticks instructor who has never used it in his own trading. The flip side is that there are plenty of candlesticks enthusiasts, including Tom Hougaard, chief market strategist at City Index.
To find out more, visit Candlecharts.com, the website of Steve Nison at www.candlecharts.com. It is impossible not to enjoy the website of this maestro. See Day 20 for details of Nison’s seminal book. Another useful site is Lit Wick at www.litwick.com, which has a good glossary of bullish and bearish indicators in candlesticks. The sites provide some – hem – illumination.

Point-and-figure chart
The point-and-figure chart, even more than the line chart, cuts out noise extraneous to pure share price movement, and focuses on trends. The Y axis represents price, the X axis measures time, and prices are plotted only when a significant and pre-decided level of change has taken place.

Point & Figure (Box size 49, Reversal amount 3)

Let us suppose that 10p is the required level of change on a point-and-figure chart representing a stock price. This measure of change is known as the box. In an upward trend, every time that the share price rises by 10p, an X will be marked. In a downward trend, whenever the price falls by 10p, 0 will be marked.

To provide a time scale, the month’s first entry on the chart may be recorded as the initial letter of the month, such as ‘F’ for February. On computer-generated charts, upward-pointing chevrons may be used for price rises, and downward-pointing chevrons for price falls.
Should the share price break the trend and change direction, it will need to register a reversal before the movement is recorded on the chart. The reversal is often larger than the box size. If it is three times as big, it will be known as the 3-box reversal. In an upward reversal, an X will be marked, changing from a 0. In a downward reversal, a 0 will be marked, changing from an X. In either case, a new column will have been opened, which starts one square across.

Some technical analysts use a method known as the Count to forecast share price movements. It requires you to check how many reversals show on the chart. The more there are the bigger the anticipated breakout, according to the theory.

If the box and reversal are small, the number of X and 0 columns tends to be large. Such a chart may cover a day’s trading. If the box and reversal are bigger, the columns will be fewer and the chart may cover weeks or even months. To conduct a thorough analysis of a single stock using point-and-figure, it is desirable to have several charts, each with a different fraction of the box size normally applied to the stock. For long-term observation, you could have a 50 per cent box size, and, for the medium term, as little as 25 per cent.
The point-and-figure chart, unlike candlesticks, is not helpful for short-term trading. It is harder to understand than the line or the bar chart, according to trader Harry Schultz. But Jeremy du Plessis, dubbed the UK’s most qualified technical analyst, favours the point-and-figure chart because he can become intimately engaged with it. David Fuller, another leading technical analyst, has made point-and-figure his prime area of focus.

To find out more, visit the informative website of Dorsey Wright Associates (www.dorseywright.com), an advisory service that specializes in this type of charting. Register with the site and you can go on a free course at its online Point and Figure University.