Page 186 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 6: Technical Analysis

4. Point - and - Figure Chart: Bar chartists count on discovering certain buying and selling Notes
forces in the market, on the basis of which they predict future price trends. These forces
consist of three factors – time, volume and price. Members of another school, known as the
point-and-figure chartists, question the usefulness of the first two factors. They argue that
the way to predict future price fluctuations is to analyze price changes only. Consequently,
they assert, no volume action need be recorded, and the time dimension (day, week, or
month) should also be ignored. If only significant price changes are important, then one
need only capture the significant (say, one point or more, ignoring all fractions) price
changes in a stock, no matter how long it takes for the stock to register this change.
Figure 6.6: A Point and Figure Chart

Charts are one of the most fundamental aspects of technical analysis. It is important that you
clearly understand what is being shown on a chart and the information that it provides. Now
that we have an idea of how charts are constructed, we can move on to the different types of chart
patterns.
6.8.2 Chart Patterns

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of
future price movements. Chartists use these patterns to identify current trends and trend reversals
and to trigger buy and sell signals.
1. Head and Shoulders: This is one of the most popular and reliable chart patterns in technical
analysis. Head and shoulders are a reversal chart pattern that when formed, signals that
the security is likely to move against the previous trend. As you can see in Figure 6.7, there
are two versions of the head and shoulders chart pattern. Head and shoulders top (shown
on the left) is a chart pattern that is formed at the high of an upward movement and signals
that the upward trend is about to end. Head and shoulders bottom, also known as inverse
head and shoulders. Head and shoulders top is shown on the left. Head and shoulders
bottom, or inverse head and shoulders, are on the right.

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