Graphical analysis of financial markets - a method of forecasting prices based on the values of past time intervals. On instruments of high volatility with high volumes, the rules of technical analysis work, since the market axiom reads: “Everything is already included in the price”. Everything is politics, wars, negotiations, accidents, crop failures, OPEC, the Fed and meteorites.
Graphic Analysis Tasks
The dynamics of the value of stock market instruments is displayed on the charts. The player decides to become an investor or a speculator based on the results of processing information about a market instrument. Investors are included in the stock exchange asset for a long time with a vague prospect of price increases. Speculators trade at short time intervals and act according to the rule "Better a small profit than a big loss."
In graphic analysis there is an element of artistic perception. As in the psychological test, all subjects are presented with the same spot at the turn of the paper, but each participant in the experiment sees his own picture in this spot.
While viewing the chart, you should more accurately determine what the change in the direction of the price in the moment indicates - a change in trend or adjustment. An erroneous conclusion during the study will lead to monetary losses until the account is reset to zero.
Charts depict the past of paper, product or currency. The trader uses analytical skills, and then builds the future on the basis of archival information:
- Calculates the possible price for a distant period using a graphical analysis method. Some analysts adhere only to the graphic. Other forecasters combine macroeconomics, politics, and finance with trading results.
- Juggling the rules of entering into a position and exiting a transaction, the analyst selects the point of the operation by graphic parameters.
The course of price changes for a fixed period of time is displayed in a two-dimensional coordinate system. The time parameters are applied to the X axis: minutes or hours, days or weeks, months or years. On the Y-axis mark the value of the forecasted instrument in the selected currency.
Construction methods
The appearance of the graph depends on the type selected. The following varieties of graphical display of information on trading parameters are common:
- Bars
- Lines.
- Japanese candles.
Types of images are indicated alphabetically without any prioritization. A novice trader should learn the practice with each of these types to stop preference on one of the three.
To make it easier for a trader to decide on the period of holding a financial instrument, one should master the construction of charts both for short (from a minute to a day) and for long (from a week to a year) time intervals.
Long-term investments in paper are planned on the basis of a graphical analysis of the charts of daily, weekly and monthly periods.
Any of the mentioned types requires information on four price values at each time interval:
- upon opening;
- at closing;
- maximum;
- minimum.
Bars are shown in a column, where the maximum is plotted at the top and the minimum at the lower end of the column. The opening price is depicted on the left side, the closing cost is drawn on the right side of the column with a short horizontal stroke. Thus, on the graph in the form of bars, the user sees four tariffs at once on each time interval.
The line chart displays only one price - open or close, low or high. By studying the past, the trader will get an idea of the next movement.
Graphical analysis of candles
This method operates with information about the state of the value of a market asset in a certain time period - opening, closing, minimum and maximum prices.
A candle has a body and a shadow. The body is a rectangle of green or red.
Japanese candles of a graphical analysis of financial markets originated in the days of writing in black ink on white rice paper. Therefore, the terms "white candle", "black candle". Until now, analysts and forecasters write about white and black. But traders work on computer technology with customizable parameters of graphic tasks. Analysts use the color on the charts of exchange programs, for example, green and red.
The green color of the candle indicates the excess of the closing price over the opening price in the time interval. Green shapes are called bullish candles.
Red indicates that the closing price is less than the opening price. Red shapes are called "bear candles."
Thin sticks - the upper and lower shadows - indicate the maximum and minimum prices, respectively.
The advantage of Japanese graphical analysis over other types is the formation of combinations - signal sources for a trend change. Combinations are usually formed of two or three candles.
Candle poem
Long candles without shadows are called "maribose." The absence of a lower and upper shadow when coinciding with the current trend indicates the preservation of the trend. A long green bullish candle without shadows with an upward trend confirms further growth. A long red bearish candle with no lower or upper shadow signals the continuation of the fall.
The longer the closure maribose, the higher the likelihood of the continuation of the trend.
If a long candle in the direction does not coincide with the main course of the price, this is a signal for a near reversal.
Candles without a body are called a dodge, or cross. The market is in limbo. The body of the candle is the price fluctuations in the time interval. Lack of body with small shadows - lack of vibrations, balance between bulls and bears. Bulls outweigh if the top shadow is longer than the bottom. Bears push if the lower shadow exceeds the upper one in length.
A graphical analysis of Japanese candle markets is based on dozens of types of candle combinations.
Mountains and valleys
Price may rise, fall and remain sideways. The monetary parameter of the traded asset varies depending on the predominance of sellers or buyers.
On the graph, changes in the direction of movement of the price look like peaks and depths. Each peak and each depth is a manifestation of the superiority of sellers or buyers.
The words “graphic analysis” also denote the search for the limits of price changes by constructing auxiliary elements to the cost figure.
A straight line drawn along two peaks is called a resistance line - the price breaks up, but sellers are stronger than buyers. In this situation, a downward correction is inevitable.
The line between the two depths is called the support line - it does not give the cost to fail. Buyers here are stronger than sellers, so the monetary parameters of the asset will rush up.
Trend Evaluation Parameters
A graphical analysis of market trade data involves looking for a trend, or trend - a series of peaks and dips. A direct trend on the chart gives the trader a concept of the duration of the price movement at the current rate.
The trend is determined by the following parameters:
- extent;
- tilt angle;
- the number of points of contact of the vertices (depths) with a direct course.
The inertia of the direction of motion is directly proportional to the length. The probability of a trend change is inversely proportional to the number of touch points.
There are short, medium, long-term trend.
A short-term trend corresponds to a duration of up to three weeks, that is, less than a month.
The medium-term trend lasts about three months.
A long-term trend is a period from three months to five years. Recently, the long-term investment period is calculated under the Constitutional Article on Elections.
A forecast of new peaks and depths behind the chart sheet and, accordingly, signals about changes in price movement trends is possible based on the law of self-preservation: a developing trend seeks to maintain the direction of movement.
Steepness
The parameter “angle of inclination” is constant at a particular stage of development of the trend. A breakdown at the price of a trend line indicates a change in course.
A trader should observe the volume of trading operations. The situation when at small trading volumes the price changes in the direction of the trend should be alarming.
Normally, in an uptrend, along with an increase in the value of an asset, an increase in volumes is recorded, and a falling price is accompanied by a decrease in volumes.
The norm for a downtrend is: an increase in volume with a decrease in the monetary value of an asset, and a rising price is adjacent to a decrease in volumes.
Graphical Analysis Models
Exchange game contains many subtleties. One of them is a short-term price movement in the opposite direction in order to give the opportunity to purchase new or sell existing securities. This movement is called adjustment.
To determine the state of the trend - a fracture or correction - price models were invented.
Since the trend can either continue or change polarity, 2 types of models are accepted:
Continuation model - in order to confirm the continuation of the direction. Fracture model - in order to diagnose a change in direction.
Course change
Consider the head-shoulders model. A relatively flat plot appears on the graph, sharply turning into a growing rounded line. At the end of this line, the price shows a sharp slowdown in growth, and then begins to fall, followed by the creation of another flat line. The graph on this site resembles a goal on the shoulders, hence the name.
Inverted “head - shoulders”, double top, triple top, double base - these types of fracture models are derived from the primary head – shoulders model.
The same way
Figures of the model of continuation of the trend in the initial direction:
The triangle is formed by lines of resistance and support, as well as a vertical line to the left.
The descending triangle has a hypotenuse line of resistance, and the support line and the vertical line serve as legs. This element signals a continued decline in the exchange rate.
An ascending triangle is formed by the hypotenuse from the support line, and the resistance line becomes a leg. This detail gives a signal of continued growth in value.
Symmetrical triangle warns of consolidation. Neither buyers nor sellers are able to overcome the resistance of the opposite side. Highs are getting smaller, lows are getting bigger, but breakdown of boundary lines does not occur. Trade is in the triangle.
Two more figures of graphical analysis formed by restrictive lines:
- Descending wedge.
- Ascending wedge.
The “flag” appears at the moment of the suspension of large price evolution. It consists of a resistance line and a parallel support line, so that a tilted rectangle is obtained. The sharp line is called the “flag pen”. Upon completion of a short consolidation, the trading direction is restored.
The reader can experiment independently over the “inverted flag” figure.
General search rules
The graphical method of analysis requires the following rules:
- A tendency has formed - there will be a model. None - the search is in vain.
- A flat geometric figure is characterized by a height equal to adding a price at a maximum, or falling when a minimum is reached.
- The size of the model is a signal for the size of changes in the market. The greater the width and height, the greater the expected changes.
- Compare the volumes at the beginning of the formation of the model and in the final stage. The volume of operations increases by the end of the formation of the model.
- As soon as the graph breaks the base of the model, the formation is completed.