The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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ChAPter 3 Mechanics and Dynamics of Charting


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raditional charting is a two‐dimensional matrix upon which technical data or
information is viewed. It affords the practitioner a means of tracking technical
data in a meaningful way, revealing various repetitive price pattern behavioral traits
and market volatility. In addition, charting also clearly reveals price distortions and
illiquidity in the market. It allows for the application of technical analysis such as
the drawing of trendlines, channels, envelopes, and chart patterns on price, helping
to uncover important price reaction levels, which are driven by the consistent under-
lying psychology and perception of all market participants. In this chapter, we shall
cover the basics of chart construction and how technical data is displayed.

3.1 The Mechanics and Dynamics of Charting


There are many ways that a technical analyst can analyze and display market
data. Data may be displayed either in a numerical or graphical form. All nu-
merical data may be displayed graphically, if required. Analysts using numerical

L e a r n i n g ob j eCt i v e s

After studying this chapter, you should be able to:

■ Understand chart construction and how technical data is incorporated and displayed
■ Describe the process by which OHLC data is created and its relationship to various charts
■ Identify and differentiate between contango and backwardation and understand the
connection with negative and positive roll yields
■ Understand the adverse effects of the bid‐ask spread on trading performance
■ Construct various charts using constant measures of time, range, volatility, trade vol-
ume, and number of transactions
■ Set up a volatility‐neutral chart for consistent viewing of price action
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