Building Blocks of Technical Analysis

January 28, 2019 | Filed under: Credit Spreads, Financial, Stock

Technical analysis is based almost entirely on the analysis of price and volume. The fields that define a security’s price and volume are defined as:

Open– This is the price of the first trade for the period (e.g., the first trade of the day). When analyzing daily data, the Open is especially important, as it is the consensus price after all interested parties were able to “sleep on it.”

High– This is the highest price that the security traded during the period. It is the point at which there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High represents the highest price buyers were willing to pay).

Low– This is the lowest price that the security traded during the period. It is the point at which there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low represents the lowest price sellers were willing to accept).

Close– This is the last price that the security traded during the period. Due to its availability, the Close is the most often used price for analysis. The relationship between the Open (the first price) and the Close (the last price) are considered significant by most technicians. This relationship is emphasized in candlestick charts.

Volume– This is the number of shares (or contracts) that were traded during the period. The relationship between prices and volume (e.g., increasing prices accompanied with increasing volume) is important.

Bar charts

A bar chart displays a security’s open (if available), high, low, and closing prices. A Bar chart is the foundation upon which all technical analysis is based. It is analogous to the hammer for a carpenter.

As illustrated in the bar chart in Figure 1, each vertical bar represents the price action for a given security during a predefined period of time.  The top of each bar represents the highest price at which trades occurred during the period, and the bottom of the bar represents the lowest trading price. The closing price is displayed on the right side of the bar. If opening prices are available, a tick on the left side of the bar signifies them.

Bar Chart Example

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