Page 184 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 6: Technical Analysis

Volume Precedes Price Notes

Another important idea in technical analysis is that price is preceded by volume. Volume is
closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If
volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to
end.
Now that we have a better understanding of some of the important factors of technical analysis,
we can move on to charts, which help to identify trading opportunities in prices movements.

6.8 Charting Techniques

One school of though led by William L. Jiler developed a comprehensive technique called
"Chart Reading". Charts provide visual assistance detecting the emerging and changing patterns
and changing patterns of price behaviour.

6.8.1 Technical Analysts use Three basic Types of Charts

1. Line Charts

2. Bar Charts
3. Candlestic Charts
4. Point and Figure Charts
1. Line Chart: The most basic of the four charts is the line chart because it represents only the
closing prices over a set period of time. The line is formed by connecting the closing prices
over the time frame. Line charts do not provide visual information of the trading range
for the individual points such as the high, low and opening prices. However, the closing
price is often considered to be the most important price in stock data compared to the high
and low for the day and this is why it is the only value used in line charts.
Figure 6.3: A Line Chart

2. Bar Charts: Most investors interested in charting use bar charts - primarily because they
have meanings familiar to a technical analyst, but also because these charts are easy to
draw. The procedure for preparing a vertical line or bar chart is simple. Suppose an

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