Introduction: candlestick charts

Candlestick charts, wluch are rapidly gaining acceptance in the West, come from Japan, where they are the charting method of choice. 

 

Japanese candlestick charts place a greater emphasis on the opening and closing prices than do bar charts.

This is accomplished by drawing a narrow vertical box delineated b y open and closethe main body.

The body is filled in (black) if the close is lower than the open; otherwise it is left empty (white).

From the top and bottom of the box,thin line segments -the shadowlines- are drawn to the high and low of the day. 

 

There are two main scaling techniques for the price axis.

1. Arithmetic Scaling

The most common scaling --> each division on the price axis is equidistant and represents an equal-point amount

2. Logarithmic Scaling 

--> far more informative are log scales

--> an equal distance at any point on the price axis represents an equal- percentage change, rather than an equal-point change.

Thus equal- interval numbers appear closer together near the top of the chart than they do at the bottom.

So 90 will be closer to 91 than 50 will be to 51.

The beauty of log scaling is that it draws the eye toward a proper assessment of risk and reward without regard to price level.

 

Example: 

Arithmetic Scale:

A one-point move at $10 covers the same distance as a one-point move at $10 --> despite move was 10% at 10$ and 1% at 100$. 

 

Log Scale: 

The one-point move covered only a tenth as much chart ground at $100 as it did at $10.

Thus the gains and losses of equal visual magnitude are of equal value to the portfolio. 

Log scaling is highly recommended. 

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