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Chart analysis (also called technical analysis) is the
study of market action, using price charts, to forecast
future price direction. The cornerstone of the technical
philosophy is the belief that all of the factors that
influence market price—fundamental information, political
events, natural disasters, and psychological factors—
are quickly discounted in market activity. In other words,
the impact of these external factors will quickly show up in
some form of price movement, either up or down. Chart
analysis, therefore, is simply a short-cut form of fundamental
analysis.
Consider the following: A rising price reflects bullish fundamentals,
where demand exceeds supply; falling prices would
mean that supply exceeds demand, identifying a bearish fundamental
situation. These shifts in the fundamental equation
cause price changes, which are readily apparent on a price
chart. The chartist is quickly able to profit from these price
changes without necessarily knowing the specific reasons causing
them. The chartist simply reasons that rising prices are
indicative of a bullish fundamental situation and that falling
prices reflect bearish fundamentals.
Another advantage of chart analysis is that the market price
itself is usually a leading indicator of the known fundamentals.
Chart action, therefore, can alert a fundamental analyst to the
fact that something important is happening beneath the surface
and encourage closer market analysis.
Charts Reveal Price Trends
Markets move in trends. The major value of price charts is
that they reveal the existence of market trends and greatly
facilitate the study of those trends. Most of the techniques used
by chartists are for the purpose of identifying significant
trends, to help determine the probable extent of those trends,
and to identify as early as possible when they are changing
direction. Types of Charts Available
The most popular type of chart used by technical analysts is
the daily bar chart . Each bar represents one
day of trading. Japanese candlestick charts have become popular
in recent years . Candlestick charts are
used in the same way as bar charts, but present a more visual
representation of the day’s trading. Line charts can also be
employed .The line chart simply connects each
successive day’s closing prices and is the simplest form of
charting.
Any Time Dimension
All of the above chart types can be employed for any time
dimension. The daily chart, which is the most popular time
period, is used to study price trends for the past year. For longer range trend
analysis going back five or ten years, weekly and monthly charts can be
employed. For short-term (or daytrading) purposes, intraday charts are most
useful. [Intraday charts can be plotted for periods as short as
1-minute,5-minute or 15-minute time periods.]
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