Mechanics and Dynamics of Charting
The majority of charts are simple price‐time charts, using the basic open, high,
low, and close information, popularly referred to as OHLC data. Let us now turn
our attention to how OHLC data is created.Quantization of price
In order to create OHLC data, we first need to specify the time interval over which
price activity occurs. For example, let us assume that we are interested in identifying
the opening, high, low, and closing prices over five‐minute intervals. We therefore
need to separate or quantize price activity with respect to time, for each successive
5‐min interval, or period. An interval or period may be of any duration, but the most
popular intervals are 1‐min, 5‐min, 15‐min, 1‐hour, 4‐hour, daily, weekly, monthly,
and yearly. In our example, the price at the beginning and end of any 5‐min interval
represents the Opening (O) and Closing (C) price respectively, while the highest and
lowest price within that period represents the High (H) and Low (L) prices. In most
cases, the closing price will also represent the opening price of the next 5‐min interval,
unless there is a gap in price. Figure 3.1 depicts price activity within a 5‐min period.
Price is quantized into 5‐min intervals and is summarized into four pieces of informa-
tion, namely the OHLC data. Note that OHLC data is also used to construct other
representations of price activity like bar charts, Gann bars, and Japanese candlesticks.
The range of a bar or candlestick is simply the absolute difference between the
high and low price, that is, range = |H - L|.
Refer to Figure 3.2. To create OHLC data for bars and candlesticks over lon-
ger periods, simply identify the:- Opening price of the first period (O)
- Closing price of the last period (C)
- Highest price between the opening and closing price (H)
- Lowest price between the opening and closing price (L)
figure 3.1 Filtering Price Action into Four Pieces of Information (OHLC).