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

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THE HAnDbOOk Of TECHnICAL AnALySIS

screen in order to fit in the trend action, making volatile price activity look less
volatile. In short, the vertical scaling is not preserved or constant. Switching off the
auto‐scaling function normalizes volatility on the charts, allowing for more accurate
price visualization. Referring to the top two charts in Figure 3.6, we observe a cer-
tain region of price activity (encircled) being portrayed as more volatile than it really
is, by virtue of increasing the height of all its bars when prices across the screen are
ranging or flattish. We see the encircled area of activity suddenly shrink in the top
right chart once auto‐scaling fits in a subsequent trend. In the bottom two charts,
we see prices maintaining the bar heights in spite of a subsequent trend appearing
on the screen. In short, auto‐scaling makes it very difficult to gain familiarity with
the subtle nuances of price behavior occurring at various timeframes of activity. It
drastically misrepresents volatility on the charts.


significance of ohLC Data


Although OHLC data is the result of filtering price activity over a specified inter-
val or period, not all data have similar significance. The opening and closing prices
are merely a function of time stamping, that is, of confining price activity to within
an arbitrary time interval (see Figure 3.7). Once that interval is completed, the
prices at that instant (i.e., on that time line) mark the closing price of the previous
bar and in most cases, the opening price of the new current bar. The situation is
vastly different in the case of the high and low prices, which are created by actual
market forces of supply and demand. The highs and lows represent areas of price
rejection, caused by the responsive actions of market participants. Traders and
investors are reacting to high and low prices by risking capital in the markets. This
makes the high and low prices more significant when compared to opening and


figure 3.6 Example of Auto‐Scaling Misrepresenting Volatility.
Source: MetaTrader 4

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