My Playground – The Bar Chart, and Why I Use It
My Playground – The Bar Chart, and Why I Use It
There is an ongoing debate between players in the market as to the best way to determine how to buy or sell. Do we look at the company reports, cash flow and debts? Or do we look at the price and volume of trades?
The simple fact is, that anyone using fundamental data between November 2007 and March 2009 was seriously disadvantaged – as data that was discovered early by the big players, institutional investors and managed funds did not become available to the average investor until 4-5 months later. Let me explain.
The Common Investor – Always the last to know
For example – there may be an earnings downgrade coming for a particular stock. First, the company directors know it. Then the fund managers know it, because they liaise very closely with management on earnings and cash-flow. Then the brokers know it, because they are the ones who will be giving the downgrade to the stock. Then the broker’s largest clients know it, because the brokers may need to offload large amounts of this stock before the word gets out, and if everyone else is selling, how can they do that and still get a good price? And lastly, the regular people on the street know it – usually after everyone else in the big leagues has sold most or all of their holdings.
All Big Action in the Market Leaves Clues
The good news is this selling from the big players – the institutional players – shows up in the price of the stock. The price chart shows us pure supply and demand. Therefore, the price bar chart is my playground also – and the good news is it’s very easy to learn.
Open High Low Close
The main focuses of the chart are the bars – called OHLC Bars – standing for Open High Low Close. Click the picture to enlarge:
1. The tick on the left is the opening price.
2. The tick on the right is the closing price.
3. The actual bar itself is the range of price, the high and low of the period (this could be 1 minute, 1 day, 1 week, etc).
Price bars form the basis of peaks and troughs, which then form the basis for specific entry and exit signals in the market – no fuzzy rules or “maybes” here. Anything that makes our job easier as a trader or investor is ok by me!
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June 11, 2009
Tags: Market Basics Posted in: Free Trading Course Lesson Backlog
2 Responses
Hi Dave, on a weekly chart, if it closes below a longer term (5-month) trend line, can i call it an exit signal or do i wait for another weekly close below the trend line to confirm? The previous trough is out of the question as by the time the bar dips below the flatter trend line, it must have surpassed a number of immediate though not very obvious previous troughs. And the more obvious previous trough is when the price last touched the trendline and is way below the current price. Hope I am not taking too much of your time by asking all these questions.
Hi Angela,
Not at all, I admire your desire to learn about the market. Very impressive!
With trend lines, you are asking some fantastic questions, and you are on your way to discovering the more advanced side of using them.
The truth is, it depends on the stock and its personality – each one is different. Back-test it over 10 years or more if you can. Some will respect the long term trend line, others will require you to use a steeper trend line and exit as soon as possible.
Hope this helps!
Dave
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