Mechanics and Dynamics of Charting
different chart scaling. Note that numerically based barrier overlays like moving av-
erages are not affected by chart scaling and display no discrepancies in their readings.the bid‐based Chart and bid‐ask spread Charts are typically drawn based
on bid prices, although many charting platforms also allow for the display of
price action based on ask and mid‐prices. The use of bid‐based price charts has a
significant effect on trading chart patterns, pullbacks, and breakouts, by virtue of
the spread between the bid and ask prices. It is also dependent on whether we are:■ (^) Buying at the ask
■ (^) Buying at the bid
■ (^) Selling at the ask
■ (^) Selling at the bid
In general, trade performance is generally adversely affected when initiating
long entries and executing long exits on bid‐based charts. It does not specifically
affect short entries or short exits. Nevertheless, since a trade consists of a buy and
a sell, the bid‐ask spread affects all trades.
Initiating short entries on bid‐based charts allows the trader to enter at the
precise price level intended. For example, assume that we want to short at a prior
resistance level of $10. Assume that the bid‐ask spread, that is, the price difference
figure 3.23 Comparing Channels on Linear and Ratio Scaling on the Daily Chart of
Energy Services of America Corp.
Courtesy of Stockcharts.com