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12

Chapter 2: The Raw Materials

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Figure 2.9 Bar chart, volume and average, Freddie Mac, 100 days. Adding a moving average to volume provides a definition of high and low volume.

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Figure 2.10 Bar chart, normalized volume, Freddie Mac, 100 days. Dividing volume by the moving average facilitates comparability.



18 Part I: In the Beginning

Table 2.2 Additional Raw Materials for the Technician

Psychological indicators such as sentiment surveys, option-trading

indicators, and futures premiums Comparisons such as relative strength to the S&P and momentum

rankings

Intermarket data depicting the relationships between related items Transaction data such as bid and ask prices, the volume of each trade,

and the exchange where traded Structural data including industry groups and economic sectors Firm-size data such as small cap versus large cap Implied volatility

Valuation categorizations such as growth versus value

average, or strong, and volume below the reference line is less than average, or weak.

Now you can compare volume across time, as well as across markets. So you might determine that volume doubled; volume was low; etc. Just as Bollinger Bands create a relative framework for price, normalizing volume using the 50-day average creates a relative framework for volume.

Finally, Table 2.2 presents some other raw materials for technical analysis. Though they are important, they need not concern us here; our focus is on price, volume, and volatility.

KEY POINTS TO REMEMBER

Basic data include the open, high, low, close, and volume.

Dont neglect the open.

Four types of charts are line, bars, point and figure, and candlestick.

Bollinger Bars are the marriage of bars and candlesticks.

Log scaling is important.

Normalize volume.



R

TIME FRAMES

Throughout this book three time frames are used: short, intermediate, and long. They are familiar terms, but they probably convey unique meanings to you based on who you are and how you trade. In one sense they can mean different things to different investors; in another sense they convey similar psychological concepts. Individual investors will imbue each term with their own horizons, while at the same time organizing the various tasks and functions according to time frame. Thus for one investor long term will mean a year, while another will consider long term to mean overnight. Yet at the same time these rather different investors will find that they have organized their investing tasks in a similar categorization of short-, intermediate-, and long-term tasks.

Up though the late seventies, short term referred to daily charts, intermediate term to weekly charts, and long term to monthly or quarterly charts. And while the charts were referred to this



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