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11 Part I: In the Beginning dates: 06/19/00-01/22/01 box:0 rev:3 last price.. .X X xrjx XD1 □ X X X X ....... X . ..... X . ....... .X. . . + . XXX . 7 9 8 74.00 -70.00 66.00 62.00 58.00 54.00 50.00 46.00 42.00 38.00 Figure 2.5 Point-and-figure chart, Freddie Mac, 120 days. Pure price action. move was 10 percent at $10 and 1 percent at $100. With log scaling 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, no matter where they are represented on the chart. Log scaling is highly recommended. The purpose of presenting bar charts and candlesticks, as well as arithmetic and logarithmic scales, is to allow you to make up your mind about which suits you better. However, let me make my preferences clear: In most circumstances I prefer log scales and Bollinger Bars.
Chapter 2: The Raw Materials | 1-1-1-1 | -1-1-1-1-1- | | | | | | | | | | | | | | | | | ..... | | | | | | | | | | | | | ll lt | | | | | | | | | | | J;VI | | | | | | | | i | | | | | | | | | | | | | | | |
5/00 6/00 7/00 6/00 9/00 10/00 11/00 12/00 Figure 2.6 Bar chart, linear scale, Freddie Mac, 200 days. A point on the chart occupies an equal distance no matter what the price level.  Figure 2.7 Bar chart, log scaling, Freddie Mac, 200 days. An equal distance on the chart indicates an equal percent change.
Part I: In the Beginning Normally volume is simply plotted beneath price in a separate clip as a histogram-that is, as lines drawn upward from a baseline typically set at zero (Figure 2.8). So it has been for many years, with only the occasional trend line or moving average drawn to create a frame of reference. And that is fine for as far as it goes, but it can be improved upon. First, the use of a moving average of volume, traditionally a 50-day average, provides a consistent reference for whether volume is high or low (Figure 2.9). It is especially important to know whether volume is high or low on a relative basis when diagnosing M and W patterns (more on Ms and Ws in Part III). For example, most of the time volume will be higher on the left-hand side of a W bottom than on the right-hand side of the same formation. Second, a reference to the average helps, but how do we compare across issues, or across markets? We do this by creating a relative measure. Divide volume by its 50-day moving average,3 multiply the result by 100, and plot it in the same place and in the same way you would have plotted the regular volume histogram with a reference line drawn at 100 (Figure 2.10). Conceptually you have grabbed the ends of the moving average and pulled it straight. Thus volume above the reference line is greater than | | | | | ",,11" | | | | | "II | PI11! | | | | | | | | | | | | | | lllllll lllh | Hill | llin | lull | | | llllilill.....bill | illiiiiiilllliliihl | liiilhiilii, |
9/00 10/00 11/00 12/00 1/01 Figure 2.8 Bar chart, volume, Freddie Mac, 100 days. Plotting volume in a separate clip adds a new and important dimension.
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