Technical Analysis

1. A detailed study on the different types of charts used by the technical analysts (Line
chart, Bar chart, candlestick, Heiken Ashi, Renko charts etc) considering the
importance of the information provided by each of them.

A trading chart is a sequence of prices drawn over a certain time frame. On the chart, the
vertical axis (the y-axis) signifies the price scale and the horizontal axis (the x-axis)
represents the time scale. Prices are illustrated from left to right across the horizontal axis
with the most recent price movement being the furthest right.

Technical analysts (who trade exclusively on charts) use charts to analyze various types of
securities and forecast future price movements.

Although technicians use graphs almost exclusively, the use of charts is not limited to just
technical analysis. They can also be of great use to fundamental analysts (who trade using
fundamental data) due to their easy-to-read graphical representation of a security’s price
movement over a specific period of time. A graphical historical record helps spot the effect
of key economic and non-economic events on a security’s price, allows you to assess its
performance over a certain period of time and whether it’s trading near extremes (highs and
lows), or in between.

1) Line chart
Line charts include one piece of trading information, which is usually the close (the last price
traded during the time frame). Some market players who trade on a daily and not on intra
daily basis consider the closing price to be outweighing the open, high or low, because
intraday swings can be ignored, if one takes into account only the close. Moreover,
sometimes there are only closing data available for some indices and thinly traded stocks,
rendering line charts the only available option.
Line Charts Explained
A line chart gives traders a clear visualization of where the price of a security has travelled
over a given time period. Because line charts only show-closing prices, they reduce noise
from less critical times in the trading day, such as the open, high, and low. Since closing
price is typically considered the most important, it is understandable to see why line charts
are popular with investors and traders. Other popular styles of charts include bar charts,
candlestick charts and point and figure charts. Traders can use line charts with other charts to
help see the full technical picture.

Benefits of Using Line Charts

● Clarity:
Traders can be overwhelmed with too much information when analyzing a security’s chart.
The trading term “paralysis by analysis” describes this phenomenon well. Using charts that
show a plethora of price information and indicators can give multiple signals that lead to
confusion and complicate trading decisions. Using a line chart helps traders clearly identify
key support and resistance levels, trends and recognizable chart patterns.
● Easy-to-Use:
Line charts are ideal for beginner traders to use due to their simplicity. They help to teach
basic chart reading skills before learning more advanced techniques, such as reading
Japanese candlestick patterns or learning the basics of point and figure charts. Volume and
moving averages can easily be applied to a line chart as traders continue their learning
journey.

2) Bar Chart
One of the most popular charting methods is the bar chart. In order for each period of the bar
chart to be plotted, you will need the high, the low, and the close. The open price is not
mandatory but is used when available. The high and low are visualized by the top and bottom
of the bar. The open price is displayed as a short horizontal line extending to the left of the
bar, while the close is the short horizontal line extending to the right. On a daily chart, each
bar represents the high, low, open and close for the particular day. Weekly charts would have
a bar for each week based on Mondays open, Friday’s close and the high and low for that
week.
Some bar charts however do not include the open price, which means that the bar is
crossed only by the close price. This variation depends on the data available.
Bar charts are more suitable for displaying a large amount of data than candlesticks. The
bar charts individual bars are relatively thin, enabling users to fit more bars before the chart
gets cluttered. Line charts show less clutter as well, but also offer less detail (no high-low
range). Bar charts which lack open price are an ideal method for analyzing the close relative
to the high and low.
Bar Size
● The size of the bar is very important. A tiny bar (small distance between high and low)
means a lack in interest by both buyers and sellers. A tall bar, with a wide distance
between the high and the low, means a lot of buying and selling interest.
● The distance between the high and low is named the trading range and an oddball bar that
is different in size or component configuration from the bar preceding it should get
attention.
● A particular pattern to watch out for is a series of small-range bars, say 40 points tall,
when the average high-low range has been averaging 65 points. A series like this usually
implies a lack of decisiveness and will be resolved by a breakout in one direction or the
other. If you have an idea about what might inspire a breakout, such as an upcoming news
release, you can position it ahead of time.
● Another pattern is a series of large-range bars, implying that the trading action is fast and
furious. "Large-range" is defined as substantially bigger than the average, say 160 points
when the average is 100. Traders cannot keep trading in such a wide range — intraday
losses are too big, and besides, fast-and-furious trading uses up the adrenaline. Traders
literally become exhausted at such a pace. Be careful about entering a market with above-
average sized bars. It can fizzle.

3) Candlestick

Originating in Japan, candlestick charts have recently become very popular. For a candlestick
chart to be plotted, you will need all the open, close high and low of the price together,
whereas for the bar chart you can have the open missing. A weekly candlestick is based on
Monday’s open, the intra- week high-low range and Friday’s close, while a daily candlestick
 uses the same price levels, but on a daily basis.
Many investors use candlestick charts because they make the relationship between the open
and the close very easy to read. Green candlesticks indicate upward price movement (when
the close is higher than the open), while red candlesticks are plotted when the close is below
the open. The distance between the open and the close, illustrated as a vertical red or green
rectangle, is called the body of the candle. The lines reaching above and below the body are
known as shadows and represent the high and low for the respective period.

4) Heiken Ashi
Heiken Ashi one of the best and fastest ways to understand the condition of the market.

Japanese traders tried to make price prediction easier and faster. Heikin-Ashi chart, that came
after the candlestick chart, is one of the several different achievements of Japanese traders. You
can predict faster using the Heikin- Ashi charts. Furthermore, they are easier than candlestick
charts to understand and trade.
Heikin-Ashi chart looks like the candlestick chart, but the method of calculation and plotting of
the candles on the Heikin-Ashi chart is different from the candlestick chart.
In candlestick charts, each candlestick shows four different prices: Open, Close, High and Low
price. Every single candlestick is independent from others and has no relation with the previous
or next candlestick.

How is Heikin-Ashi formed?

On the opposite, Heikin-Ashi candles are calculated and plotted using some information from the
previous candle:

● Open price: the open price in a Heikin-Ashi candle is the average of the open and close of
the previous candle.
● Close price: the close price in a Heikin-Ashi candle is the average of open, close, high and
 low prices.
● High price: the high price in a Heikin-Ashi candle is chosen from one of the high, open
and close price, which has the highest value.
● Low price: the low price in a Heikin-Ashi candle is chosen from one of the high, open and
close price, which has the lowest value.

Heikin-Ashi chart is slower than a candlestick chart and its signals are delayed due to the relation
of candles between each other. This delay has made the Heikin-Ashi candle a good indicator for
volatile currency pairs because it prevents us from rushing and making mistakes and trading
against the market.

Because of the delay the Heikin-Ashi chart has less number of false signals and prevent us from
making false decisions. On the other hand, Heikin-Ashi candles are easier to read because unlike
the candlesticks they don’t have too many different patterns.

Some traders rely solely on Heikin-Ashi to trade. It is a good idea especially for those who are
not patient and disciplined enough or those who lose because of entering too early and exiting
too late. It helps you follow the trending markets, because it keeps you wait for a longer time,
and then it lets you in when you are at the beginning of a strong trend.

5) Renko charts

Renko charts are created by setting a box size/brick size. A brick on the renko chart is formed
only when the price has moved up/down by the set brick size. A candlestick chart, on the other
hand, shows the price movement over a period of time, such as one minute or one day. While
there is a time axis along with the renko chart, there is no set time limit for how long a renko brick
takes to form. It could take 2.5 minutes, 8 minutes or 8 days. It is dependent on the volatility of
the asset and the set brick size.
You have to choose the desired brick size while selecting Renko chart, making sure to select a
brick size which meets the following criteria to get more practical results:
● The brick size should be big enough to smoothly represent the stock movement for that
candle interval in the charts.
● The brick size should also be such that on average there are no more than 1 brick being
formed for the chosen candle interval.

Examples to set brick sizes:

● Brick size can be set as the difference between pivot point line and support 1 line of the
desired candle interval.
● Brick size can be set the ATR value of the desired candle interval.

With experience and usage one can directly set the renko size by seeing the movements of
the stock or based on their desired target profits and stop loss. During backtest and
deployment, we calculate renko bricks only at the completion of each candle interval and
perform trades when the condition has been met only for the last renko brick formed for that
 specific candle interval.
2. Do a study on ‘How to read a candlestick chart’ with regard to the OPEN PRICE,
HIGH PRICE, LOW PRICE, CLOSING PRICE, PRICE DIRECTION and PRICE
RANGE on different time frames – Monthly, weekly and Daily chart.

A candlestick chart is simply a chart composed of individual candles, which traders use to
understand price action. Candlestick price action involves pinpointing where the price
opened for a period, where the price closed for a period, as well as the price highs and lows
for a specific period.

Price action give traders of all financial markets clues to trend and reversals. For example,
groups of candlesticks can form patterns which occur throughout forex charts that could
indicate reversals or continuation of trends. Candlesticks can also form individual formations
which could indicate buy or sell entries in the market.
The period that each candle depicts depends on the time-frame chosen by the trader. A
popular time-frame is the daily time-frame, so the candle will depict the open, close, and high
and low for the day. The different components of a candle can help you forecast where the
price might go, for instance if a candle closes far below its open it may indicate further price
declines.

Interpreting a Candle On a Candlestick Chart

The image below represents the design of a typical candlestick. There are three specific
points (open, close, wicks) used in the creation of a price candle. The first points to consider
are the candles’ open and close prices. These points identify where the price of an asset
begins and concludes for a selected period and will construct the body of a candle. Each
candle depicts the price movement for a certain period that you choose when you look at the
chart. If you are looking at a daily chart each individual candle will display the open, close,
upper and lower wick of that day.
 Open price:
The open price depicts the first price traded during the formation of the new candle. If the price
starts to trend upwards the candle will turn green/blue (colors vary depending on chart settings).
If the price declines the candle will turn red.

High Price:
The top of the upper wick/shadow indicates the highest price traded during the period. If there is
no upper wick/shadow it means that the open price or the close price was the highest price
traded.

Low Price:
The lowest price traded is the either the price at the bottom of the lower wick/shadow and if
there is no lower wick/shadow then the lowest price traded is the same as the close price or open
price in a bullish candle.

Close Price:
The close price is the last price traded during the period of the candle formation. If the close
price is below the open price the candle will turn red as a default in most charting packages. If
the close price is above the open price the candle will be green/blue (also depends on the chart
settings).
The Wick:
The next important element of a candlestick is the wick, which is also referred to as a ‘shadow’.
These points are vital as they show the extremes in price for a specific charting period. The
wicks are quickly identifiable as they are visually thinner than the body of the candlestick. This
is where the strength of candlesticks becomes apparent. Candlesticks can help traders keep our
eye on market momentum and away from the static of price extremes.

Direction:
The direction of the price is indicated by the color of the candlestick. If the price of the candle is
closing above the opening price of the candle, then the price is moving upwards and the candle
would be green (the color of the candle depends on the chart settings). If the candle is red, then
the price closed below the open.

Range:
The difference between the highest and lo west price of a candle is its range. You can calculate
this by taking the price at the top of the upper wick and subtracting it from the price at the
bottom of the lower wick. (Range = highest point – lowest point).
Having this knowledge of a candle, and what the points indicate, means traders using a
candlestick chart have a clear advantage when it comes to distinguishing trendline, price patterns
and Elliot waves.

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