Data Organization

Technical analysts organize price and other technical data in various ways to forecast market direction. Some of the most popular and best methods are also the simplest, such as bar charts, moving averages, and momentum indicators. Because analysts and traders are always looking for new ways to gain better insight into price movement and to improve trading results, they often discover new wrinkles on old methods or come up with entirely new analytical concepts.

Charts and Patterns

Bar charts offer the oldest, easiest and most common way to organize prices. With a personal computer, it's easy to generate bar charts for practically any time period from as short as a minute to as long as a year. The most popular time frames range from five minute bar charts (i.e., the high, low and close for every five minute period during the trading day) to hourly, daily, weekly and monthly time frames. (Example 2.3, 2.4, 2.5, 2.6, 2.7).

Example 2.3, 2.4, 2.5, 2.6 & 2.7 British Pound, Sept 05, Day Pit, 60 mins Analysts make wide use of bar charts because the charts provide two kinds of useful information:
• What a market has been doing, and
• Where it appears to be heading, according to the patterns that appear on the charts.
Traders tend to react similarly to bullish or bearish news (or other market conditions) over a long period of time and, as a result, similar price patterns take shape over time. Patterns can be helpful in formulating trading strategy, such as entry and exit points, and can give some indication as to whether the fundamental balance of a market has
changed. Patterns can also offer insight on market psychology, e.g., whether bullish or bearish sentiment may be changing.

Bar Charts

We’ve already explained that bar charts are useful tools because they provide information about a market’s past behavior and possible behavior in the future.
Bar charts are also simple to construct. Simply plot the time frames you’re looking at (e.g., each day) left to right along the horizontal axis and plot prices on the vertical axis. Then, draw a vertical line connecting the high and low price for each time period (minute, hour, day, etc.). Indicate the closing price with a half cross-hatch to the right of the line (the "bar") and the opening price with a half cross-hatch to the left of the bar. Bar charts usually ignore weekends, but account for holidays with a blank space. (If doing this manually, it's best — for convenience and clarity — to use five-by-five graph paper that highlights every fifth grid on the chart. This makes it easy to see when a new week begins.) Not long ago traders typically kept daily bar charts by hand and used them almost exclusively. Now, with computers, traders can generate bar charts for almost any time frame they’d like to study, down to a 1-minute bar. Of course, for many traders a microscopic view of the market isn't necessary, and can actually be counterproductive, because too small a time period creates a "can't see the forest for the trees" situation.

Weekly Bar Charts

Weekly charts are long-term enough to provide a view similar to monthly charts but are better at exhibiting the price patterns used in forecasting market direction (Example 2.13), which will be discussed later on. However, most traders choose shorter-term bar charts as their basic informational tool.

Monthly Bar Charts

To get a broader perspective of a market, analysts/traders look to weekly and monthly charts, constructed the same way but with each vertical bar representing price ranges for a weekly or monthly period. These types of charts are often used by long-term trend followers but can help any trader gain a "historical" feel for a market (Example 2.12)

It’s evident from long-term charts that many markets have long-term "value areas" where prices often bottom. That information alone can be extremely important in formulating trading strategies. However, due to their longterm nature, monthly charts seldom show the price patterns normally used to predict market direction.