Shares digital

It probably goes without saying that price is the most important aspect of analysing a share or market, at least for technical analysis or charting. Yet in many ways, though chartists stare at charts, the detail of what they look at is often ignored.

Of charts’ many guises, the simplest may be a plot of the daily closing price on which optionally each close is joined by a line. For a long time, little else was available to those not privy to intra-day data from the London Stock Exchange’s Official List or other such tomes.

Bar charts now offer a fuller answer. They depict the high-to-low range for the time interval in the shape of a vertical line on which two notches are made, one on the left of the range for the opening price of the day (or time interval as bar charts are also used for intra-day time intervals and for weekly and monthly charts) and one on the right to denote the closing price.

The Japanese have been using charts since the 1700s to plot rice prices, and developed the candlestick approach. Similar to bar charts, the range of the vertical bar between the open and close notches is made fatter to form the body of a candle, which traditionally is either coloured in if the close is below the open or left vacant if the close is above the open. The activity outside this open-to-close range remains a thin vertical line, which can be either above or below the ‘candle body’ or both. These lines are called the wicks.

Both bar charts and candlestick charts offer the opportunity to determine on a bar-by-bar basis whether there is a surplus of buying pressure or selling is overcoming demand.

There are many candle patterns and now some computer programs can be used to label them or search for them, as Sharescope has done in my example chart.

Simply by looking at the candle pattern or the price bar and its corresponding close level you can pretty accurately know what happened that day. Did the close occur near the top of the bar or near the low of the day? Was the range of the day large or narrow? How did the range relate to recent days’ activity? All these questions will help to illuminate what is actually going on.

While simple line charts are easy on the eye and have their place in providing a general analysis of trend, they risk placing too much emphasis on a single price – the close. A more detailed plot can be very valuable. Taking the time to examine the daily interplay in this way is time well spent.