Technical analysis is the graphical study of charts. A financial chart represents the evolution of an asset price over time. There exist different types of charts that convey more or less information about the evolution of the asset price over a chosen period. Please find below a brief description of different chart types used by professional traders.
It consists of merely plotting the closing prices of an instrument over a chosen time period.
Implications: While this most basic chart is easy to construct, the open, high and low data is not plotted for consideration.
Vertically plotting the open, high, low and closing price of an instrument for a chosen time period will produce the bar chart.
Implications: It overcomes the weaknesses of the line chart by including open, high, low and close data for scrutiny.
It consists of plotting the open, high, low and closing values for an instrument. However, the difference between the opening and closing values forms the candle and is termed the “real body”. The wicks that protrude above and below the real body are termed “upper shadows” and “lower shadows” respectively. Hollow real bodies are usually used to represent days with a positive net change in price, while solid real bodies usually represent days with a negative net change in price.
Implications: This is the most commonly used graphical representation by technicians as the up and/or down days are more easily discernible.
Point and Figure Chart
It records price changes that are defined by box size criteria. While “X’s” and “O’s” denote upmoves and downmoves respectively, prices must reverse by the amount of the box size in order to be plotted. The example in displays a point and figure chart for USD/CAD using a box size of 10×3. Therefore, each “X” or “O” represents a price move of 10 points, and prices must reverse by a minimum of 30 points (10×3 is termed the reversal amount) in order to be plotted.
Implications: A multidimensional chart format that eliminate the “time dimension” and concentrates on pure price movement. This type of chart is used by experienced trader and for the analysis of longer term trends, it is then less relevant for binary option traders and is almost never proposed by binary option brokers.
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