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A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis by Mark Andrew Lim

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CHAPTER 3

Mechanics and Dynamics of Charting

LEARNING OBJECTIVES

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 its 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 volume, and number of transactions
  • Set up a volatility-neutral chart for consistent viewing of price action

Traditional 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 patterns behavioral traits and market volatility. In addition, charting also clearly reveals price distortions and il-liquidity 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 underlying 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 ...

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