What is Technical Analysis?

Bar Charts
A bar chart shows a sequence of vertical bars. Each bar joins the traded low to the traded high for a particular hour, day, week, month (or other period) to show the full trading range for the chosen time period. The close for the period in question is shown by a small horizontal bar extending out to the right. The opening level, if required, is normally shown as a small horizontal bar extending out to the left. Bar charts can thus provide a significant amount of information in different time frames, and are widely used for both trading and longer term investment purposes.

Candlestick Charts
Candlestick charts use the same data as bar charts, but display it differently, and the use of the opening trade is not optional – it is always incorporated, as the candlestick has a wide part, called the ‘real body’, which displays the range between the chosen period’s open and close. Vertical lines (the ‘shadows’) either end show the actual high and low trades – these tend to look like the wicks of a candle. But it is the ‘real body’ that can have important forecasting implications. A close higher than the open will be represented by a ‘clear’ or white (bullish) candle, the reverse will produce a ‘filled’ or black (bearish) candle. Different colour schemes may be seen: green for bullish and red for bearish have become popular in recent years. This instant display of a bullish or bearish period makes candles very useful for traders needing to make quick decisions.

Point & Figure Charts
A Point & Figure chart shows columns of Xs, denoting rising prices, and Os, denoting falling prices. Each of these ‘boxes’ represents a pre-determined price move that must occur to justify the entry of a new X or O: only a certain move in prices prompts a chart update and the passing of time is not a factor in these charts. Prices are further filtered to start a new column: in the most commonly used 3-box reversal chart, for instance, a 3-box minimum move is required to give rise to a new column, representing a move in the opposite direction. Point & Figure charts are particularly appreciated by investors requiring unambiguous entry and exit points.

Fibonacci numbers, retracements and extensions
The 1,1,2,3,5,8,13,21,34… number sequence, constructed by adding the first two numbers to make the third, takes its name from an Italian mathematician known as ‘Fibonacci’, who discussed it some 800 years ago in his book Liber Abaci. The ratio of any number in the sequence to the next lower is approximately 1.618 (phi, the famous golden ratio); the ratio of any number to the next higher approaches the inverse, 0.618. Given the omnipresent nature of the golden ratio, the extension is made to the character of price moves. Percentages such as 38.2% and 61.8%, derived from phi or its inverse, are used to calculate potential retracements of a price advance or decline, and to pinpoint possible next price targets. These techniques, usually known as Fibonacci retracements and Fibonacci extensions (also called projections), are used both with and without the additional structures of the Elliott Wave Principle. Technicians also utilise the actual Fibonacci numbers, both in time cycle analysis and in the construction of moving averages.

Bar Chart

Candlestick Chart

Point & Figure Chart