Graphic market analysis: figures, models, methods and features

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Graphical analysis of financial markets is a method of price forecasting based on the values of past time intervals. On instruments of high volatility with high volumes, the rules of technical analysis work, since the axiom of the market says “Everything is already priced in”. Everything is politics, wars, negotiations, accidents, crop failures, OPEC, the Fed and meteorites.

Problems of graphical analysis

Dynamics of the value of stock market instruments is displayed on the charts. The player decides to become an investor or a speculator based on the results of processing information about a market instrument. Investors enter an exchange-traded asset for a long time with a vague prospect of price growth. Speculators trade on short time frames and operate according to the rule “Better a small profit than a big loss.”

There is an element of artistic perception in graphical analysis. As in a psychological test, all subjects are presented with the same spot on a paper spread, but each participant in the experiment sees his own spot in this spot.picture.

While viewing the chart, you should determine more precisely what the change in price direction at the moment indicates - a change in trend or an adjustment. An erroneous conclusion during the study will lead to monetary losses up to zeroing the account.

Charts depict the past of a paper, commodity or currency. The trader uses analytical skills, and then builds the future based on archived information:

1. Calculates a possible price for a remote period by a graphical method of analysis. Some analysts stick only to the chart pattern. Other forecasters combine macroeconomic, political and financial data with trading results.
2. Juggling the rules for entering a position and exiting a trade, the analyst chooses the point of the operation using graphical parameters.

The course of price changes for a fixed period of time is displayed in a two-dimensional coordinate system. Time parameters are plotted on the X-axis: minutes or hours, days or weeks, months or years. On the Y-axis, the value of the predicted instrument in the selected currency is marked.

Construction methods

Chart appearance depends on selected type. The following types of graphical display of information about trading parameters are common:

• Bars.
• Lines.
• Japanese candles.

Types of images are listed alphabetically without any priority. A novice trader should master the practice with each of the listed types in order to settle on one of the three.

To traderit was easier to decide on the holding period of a financial instrument, one should master the construction of charts both for short (from a minute to a day) and for long (from a week to a year) time intervals.

Long-term investments in paper are planned on the basis of a graphical analysis of daily, weekly and monthly charts.

Any of the mentioned types requires information about four price values in each time interval:

• when opening;
• at closing;
• maximum;
• min.

Bars are depicted as a column, where the maximum is on the upper end, and the minimum is on the lower end of the column. The opening price is depicted on the left side, the closing price is drawn on the right side of the column with a short horizontal stroke. Thus, on the chart in the form of bars, the user sees four tariffs at once on each time interval.

A line chart displays only one price - open or close, low or high. By studying the past, the trader will get an idea of the next move.

Graphic candlestick analysis

This method operates with information about the state of the value of a market asset in a certain time period - opening, closing, minimum and maximum prices.

A candle has a body and a shadow. The body is a green or red rectangle.

Japanese candles of graphical analysis of financial markets originated in the days of black ink writing on white rice paper. Therefore, the terms “white candle”, “black candle” have developed. StillAnalysts-forecasters write about white and black. But traders work on computer technology with customizable graphic task settings. Analysts use color on stock program charts, such as green and red.

Green color of the candle indicates the excess of the closing price over the opening price on the time interval. Green patterns are called "bullish candles".

Red color means that the closing price is less than the opening price. Red patterns are called "bearish candles".

Thin sticks - the upper and lower shadows - indicate the maximum and minimum price, respectively.

The advantage of Japanese graphical analysis over other types is the formation of combinations - sources of signal to change the trend. Combinations are usually formed from two or three candles.

Candle Poem

Long candles without shadows are called "maribose". The absence of lower and upper shadows, when coinciding with the current trend, means that the trend continues. A long green bullish candle without shadows in an uptrend confirms further growth. A long red bearish candle without a lower or upper shadow signals a continuation of the fall.

The longer the marubozu close, the more likely the trend will continue.

If a long candle in direction does not coincide with the main price rate, this is a signal for a close reversal.

Candlesticks without a body are called a dodge, or a cross. The market is in limbo. The body of the candle is the fluctuations in the price oftime interval. Lack of body with small shadows - no hesitation, balance between bulls and bears. Bulls outweigh if the upper shadow is longer than the lower one. Bears push if the lower shadow is longer than the upper one.

Graphic analysis of markets using Japanese candlesticks is based on dozens of types of candle combinations.

Mountains and valleys

Price can rise, fall and stay flat. The monetary parameter of the traded asset changes depending on the predominance of sellers or buyers.

On the price reversal chart, prices look like tops and depths. Each peak and each depth is a manifestation of the predominance of sellers or buyers.

The words "graphical analysis" also mean the search for price change limits by constructing auxiliary elements to the cost pattern.

A straight line drawn along two tops is called a resistance line - the price is torn up, but sellers are stronger than buyers. In this situation, a downward correction is inevitable.

The straight line between two depths is called the support line - it does not allow the price to fall. Buyers are stronger than sellers here, so the monetary parameters of the asset will rush up.

Trend estimation parameters

Graphical analysis of market trading data implies the search for a trend, or a trend - a series of peaks and dips. The trend line on the chart gives the trader an idea of the duration of the price movement at the current rate.

The trend is determined by the following parameters:

• length;
• tilt angle;
• number of vertex (depth) touch points from the straight course.

The inertia of the direction of movement is directly proportional to the length. The probability of a trend change is inversely proportional to the number of touch points.

Distinguish between short-term, medium-term, long-term trend.

Short-term trend corresponds to a duration of up to three weeks, that is, less than a month.

The medium-term trend continues for about three months.

A long-term trend is a period from three months to five years. Recently, the long-term investment period is calculated according to the article of the Constitution on elections.

Forecast of new peaks and depths behind the chart sheet and, accordingly, signals of a change in price trends is possible based on the law of self-preservation: a developing trend seeks to maintain the direction of movement.

Slope of corner

The "angle of inclination" parameter is constant at a specific stage of trend development. A price breakout of the trend line indicates a change in course.

A trader should watch the trading volumes. The situation when the price changes in the direction of the trend on small trading volumes should be alarming.

Normally, on an uptrend, along with an increase in the value of an asset, an increase in volumes is fixed, and a falling price is accompanied by a decrease in volumes.

Normal for a downtrend: an increase in volume with a decrease in the monetary value of an asset, and a rising price is adjacent to a decrease in volumes.

Graphic analysis models

Stock game containsmany subtleties. One of them is a short-term movement of the price in the opposite direction in order to provide an opportunity to purchase new or sell existing securities. This movement is called an adjustment.

To determine the state of the trend - a break or correction - price models were invented.

Since the trend can either continue or change polarity, 2 types of models are accepted:

Model of continuation - in order to confirm the continuation of the direction. Fracture model - for the purpose of diagnosing a change in direction.

Change of Course

Let's consider the head-and-shoulders model. A relatively flat area appears on the chart, sharply turning into a growing rounded line. At the end of this line, the price has a sharp slowdown in growth, and then a fall begins, followed by the creation of another flat line. The chart on this section resembles a goal on the shoulders, hence the name.

Inverted head-and-shoulders, double top, triple top, double bottom-these types of fracture patterns are derived from the primary head-and-shoulders pattern.

The same way

Figures of the trend continuation pattern in the original direction:

• Triangle.
• Flag.
• Rectangle.

The triangle is formed by resistance and support lines, as well as a vertical line on the left.

The descending triangle has a resistance line as its hypotenuse, while the support line and the vertical line serve as legs. This element indicatescontinued depreciation of the exchange rate.

The ascending triangle is formed by the hypotenuse from the support line, and the resistance line becomes a leg. This detail gives a signal about the continued growth in value.

Symmetrical triangle warns of consolidation. Neither buyers nor sellers are able to overcome the resistance of the opposite side. The highs are getting smaller, the lows are getting bigger, but there is no breakdown of the limit lines. Trading is in a triangle.

Two more figures of graphical analysis formed by limit lines:

• Descending wedge.
• Rising wedge.

"Flag" occurs at the moment of suspension of major price evolutions. Consists of a resistance line and a parallel support line, so it's a slanted rectangle. The line of sharp growth is called the "flag handle". At the end of a short consolidation, the direction of trading is restored.

The reader can experiment on the "inverted flag" figure on their own.

General search rules

The graphical method of analysis requires following the rules:

1. A trend has formed - there will be a model. Missing - search in vain.
2. A flat geometric figure is characterized by a height equal to the addition of the price at the maximum, or the fall when the minimum is reached.
3. The size of the pattern is a signal for the size of the change in the market. The larger the width and height, the greater the expected change.
4. Compare the volumes at the beginning of the model formation and at the final stage. The volume of operations increases towards the end of the model formation.
5. As soon as the chart breaks the bottom of the pattern, the formation is complete.