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The Visual Investor: How to Spot Market Trends, Second Edition by JOHN J. MURPHY

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CHAPTER 3
Pictures That Tell a Story
Having learned how to identify a trend, to spot support and resistance levels, and to draw a trendline, the visual investor is ready to look for price patterns. Prices have a tendency to form patterns or pictures that often indicate which way a stock is going to trend. It should be obvious that the ability to distinguish between patterns that represent nothing more than an interruption in the primary trend and those that signal an impending trend reversal is a valuable skill to acquire. In order to accomplish a complete analysis of any chart, it is important to take both price and volume (trading activity) into consideration. We’ll see how to incorporate volume into your chart analysis. But first, a quick word on the types of charts available for visual analysis.

CHART TYPES

The Bar Chart

We’re going to confine our discussion to the most popular chart types, beginning with the bar chart. A daily bar chart represents each day’s price action with a vertical bar and horizontal price ticks, one to the left and one to the right of the vertical bar (see Figure 3.1). The vertical bar connects the high price of the day to the low price. The vertical bar measures the stock’s daily price range. A small horizontal tick is placed to the left of the bar, which represents the opening price. The small horizontal tick to the right of the vertical bar represents the closing price. The price bar tells us where the stock opened (left tick), where it closed ...

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