Module 2

Constructing and
Interpreting Charts

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Learning Objectives

• Identify different chart types including line charts, bar charts,

candlestick charts, point and figure charts and other styles.

• Integrate chart patterns and behavioral finance.

• Apply important charting concepts including trend, support,

resistance, volume and gaps.

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Patterns Can Be Seen In All Chart
Styles
• Line charts include the least amount of information but just as
useful as other styles.

• Bar charts represent each time period as a bar and add

information about the size of the range (high – low) which depicts
a measure of volatility.

• Candlesticks add a level of detail absent from bar charts by

coloring the candle to show whether the close was up or down
relative to the open.

• Point and figure charts ignore time and show only price action,
focusing on the trend.
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Different Styles Show the Same Patterns

Line
Line Candle

Bar
P&F

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Which Chart Is Best?

• The answer to any “which is best?” question is always:

• The best one is the one you are most comfortable with.
• Or, the one your client or boss prefers.

• All chart styles can be used productively and sometimes

profitably.
• Profitability will require a disciplined approach.
• To be profitable, a complete trading plan will be needed
defining entries and exits; the plan must be followed
with discipline, taking all trades; and the plan must be
followed for an extended period of time.

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Most Popular Charting Styles on Bloomberg

Americas Europe Asia MESA

Line 51% 55% 41% 48%
Bar 32% 20% 14% 20%
Candlestick 14% 21% 43% 31%
Log 3% 4% 1% 1%

Log charts provide a long-term perspective.

Most chart views (69%) are of historical data while 31% are intraday data.

Source: New Frontiers in Technical Analysis (2011) by Paul Ciana, CMT.

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Log Charts Provide a Long-Term Perspective

Arithmetic scale

Log scale

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Line Chart

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Charts are fractal

• Patterns are visible in any time frame.

• The same principles apply in any time frame.

• Trends are often easier to spot in higher time frames

(monthly, for example).
• Prices tend to exhibit mean reversion in the short term
and trending behavior in the long run.

• Indicators can be applied in any time frame.

• This applies to any type of chart style.

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Patterns are visible in any time frame

One-minute chart

Monthly chart
Uptrend
with break

Daily chart Uptrend

Uptrend

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Bar charts

• The length of the bar shows the struggle between bulls and bears
during the day.

• The high shows the maximum power of bulls.

• The low shows the maximum power of bears.

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Bar chart (with volume)

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Construction of a candlestick chart

• Each candle shows the price action for one time period (day, week,
etc.).
• The candle consists of a rectangle defined by the open and close
and wicks or shadows which show the high and low. Body is
colored in if the close < open and clear if close > open.

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Comparison of candlestick charts with other chart
types

• The body of the candlestick adds information not visually available

in other charts.
• The color of the body (black/white or red/green) shows
whether bulls or bears had more power in that time period.

• Candles form patterns quickly, just 1-3 candles in many cases.

• This allows for quick reaction to changes in the trend

• There are no real disadvantages to candlesticks since they include

the same information a bar chart has

• Like a bar chart, candlestick patterns should be confirmed with

volume or other indicators

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Traditional candlestick chart

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P&F chart

Uses X for up
trends, O for
downtrends

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P&F charts

• Xs signify up moves; Os signify down moves.

• Construction based on box size and reversal size.
• Box size is the number of points per X or O.
• Often set to $1.
• Higher values are less sensitive to trend reversals.
• Lower values are more prone to reverse.

• Reversal size is usually 3.

• When price reverses by 3, start a new column.
• If up trend, and price moves down by $3, switch from a
column of Xs to Os.
• If down trend and price rises $3, switch from Os to Xs.

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Constructing a P&F chart

Prices are in a down trend and the following market action unfolds:

High Low

Day 1 15.50 12.90

Day 2 12.20 11.70

Day 3 12.60 10.90

Day 4 10.95 10.75

Day 5 14.10 11.95

Day 6 15.99 13.80

Day 7 15.10 12.00

Box size is $1 and reversal size is $3.

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Day 1

• Prices are in a downtrend which means we are in a column of Os.

So, we look if the price action dictates more Os.

Day 1 High = 15.50 Low = 12.90

We fill in Os to $13.

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Day 2

Day 2 High = 12.20 Low = 11.70

We fill in Os to $12.

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Day 3

Day 3 High = 12.60 Low = 10.90

We fill in Os to $11.

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Day 4

Day 4 High = 10.95 Low = 10.75

Price move is small and no

changes are needed.

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Day 5

Day 5 High = 14.10 Low = 11.95

There is little downside

movement but, the upside
move allows us to draw 3
Xs.

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Day 6

Day 6 High = 15.99 Low = 13.80

We fill in Xs to 15.

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Day 7

Day 6 High = 15.90 Low = 12.00

There is a downside
reversal with 3 Os.

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Over time, the chart develops more detail

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Generally P&F patterns are based on breakouts

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Typical P&F chart: Signals are rare and useful

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Example: Zoom

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Example: Lyft

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Example: GE

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