Main types of charts

1. A linear chart – plots only the closing price for every subsequent period. It is recommended for short time frames (up to several minutes).

2. A bar chart – shows the highest price (upper point of the bar), the lowest price (lowest point), the opening price (the dash to the left of the vertical axis) and the closing price (the dash to the right of the vertical axis). It is recommended for time frames of 5 minutes and longer.

3. A Japanese candlestick chart (is made on the analogy of the bars). The rectangle between the opening price and the closing price is called the candlestick, while the dashes from the candlestick to the high and low prices at any given time frame are called shadow. The presentation is similar to representation in bars. The candlestick with high > low is called a bullish candlestick (White Day) and its body is filled in white (or green). The candlestick with high < low is called a bearish candlestick (Black Day) and its body is filled in black (red). The candlestick, where the open and the close are approximately equal, and the high and low are very different, i.e. the body of the candlestick has a small size as compared with the shadow are called Doji.

4. A point and figure chart: does not have linear representation of time, a new bar of prices is plotted after another trend appears in the dynamics. A figure is drawn if the prices go down by a certain number of points (reverse criterion), if the prices go up by a certain number of points, a point is drawn.

5. Arithmetic and Logarithmic Scales. For some types of analysis, especially if it concerns long-term trend analysis, it is useful to utilize the logarithmic scale. In the arithmetic scale the distance between the points is invariable. In the logarithmic scale, a similar distance corresponds to similar changes percentagewise.

6. Volume charts.

DOW THEORY

Initially, the principles set forth by Charles Dow were used to analyze the American indexes created by him, the industrial and railroad industrial averages. But most of Dow’s analytical derivations can be equally well used on financial markets.


Tenets of Dow Theory:

1. Averages discount all news. According to Dow’s theory, any factor that can someway influence the supply or demand will be reflected in the dynamics of the averages. These events are, of course, unpredictable. Nevertheless, they are taken into account by the market right away and are reflected in the dynamics of the averages.

2. There are three types of tendencies on the market. During the uptrend, every following peak and every following fall are higher than the previous one. During the downtrend, every following peak and every fall are approximately at the same level as the previous ones.
Dow also distinguished three categories of movements: primary, secondary and daily fluctuations. He assigned the highest significance to the primary movement, which lasts over a year, and sometimes several years. The secondary (or reaction) movement is a correction movement as regards the primary movement and usually lasts as much as three weeks to three months. Such intermediate corrections retrace 1/3 to 2/3 (very often a half) of the movement of the prices during the previous (primary) move. Daily fluctuations or short-term trends last not more than three weeks and represent short-term fluctuations within the intermediate trend.

3. The primary tendency has three phases. The first phase, or the accumulation phase, when the most far-seeing and wise investors start buying, as all unfavourable economic information has been already considered by the market. The second phase begins when those who use technical methods for tracing trends join the game. Economic information becomes more and more optimistic. The trend passes to its third, or final, phase when public at large starts participating, and a flurry that is stirred up by mass media begins on the market. Economic forecasts are optimistic. The volume of speculations rises. That’s when the the most far-seeing and wise investors that were "accumulating" at the end of the previous move when no one wanted to "accumulate", start "to distribute". That’s the end of the tendency.

4. Averages must confirm each other. Here Dow meant the industrial and railroad industrial averages. To Dow, any important signal of bull market or bear market has to be presented in both averages.

5. The volume must confirm the trend. The volume must rise in the direction of the primary trend.

6. The trend exists until definite signals prove that it has changed.

History repeats itself. This postulate is based on the objective character of laws of physics, economics, and psychology. The rules that were valid in the past function now as well and will function in the future. All interpolation techniques of future prediction are, in fact, based on that. And the future, intrinsically, repeats the past.