Chapter 2: The Raw Materials

for each period, such as the daily advance-decline line or a value for an index calculated just once a day, as shown in Figure 2.1.

A conventional bar chart, shown in Figure 2.2, consists of a vertical line connecting the high and low with a horizontal tick to the left at the open and another horizontal tick to the right at

Figure 2.1 Line chart, Freddie Mac, 100 days. Note the lack of detail.

Figure 2.2 Bar chart, Freddie Mac, 100 days. This is a much better view of the action.

Part I: In the Beginning

the close. When volume is included, it is usually plotted in a separately scaled clip beneath the price clip as a histogram rising from a baseline of zero. Each volume bar records the volume of trade during the period depicted by the price bar immediately above it. (Often the last two-or more-digits of volume are omitted.)

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 by open and close-the 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 Une segments-the shadow lines- are drawn to the high and low of the day if these points are outside the box, as seen in Figure 2.3.1 have employed candlestick charts for many years and prefer them to bar charts; they create a clearer picture for me.

Bollinger Bars (Figure 2.4) were created in an effort to combine the advantages of both bar and candlestick charts. Bollinger Bars are a cross between bar charts and candlestick charts, where the portion of the bar between the open and the close is colored red if the close is lower than the open or green if the close is higher. The remainder of the bar is colored blue.

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Figure 2.3 Candlestick chart, Freddie Mac, 100 days. The important relationship between the open and the close can now be seen clearly.

Chapter 2: The Raw Materials

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Figure 2.4 Bollinger Bars, Freddie Mac, 90 days. This is a Western take on candlesticks.

These bars have the benefit of highlighting the important relationship between the open and close without taking up the extra space the candlesticks require. Bollinger Bars can be seen in action on http: www.EquityTrader.com.

Point-and-figure charts (Figure 2.5) reduce price action to its very essence, plotting rising columns of Xs when prices are strong and falling columns of Os when prices decline. No reference is made to time2; all that appears is price movement filtered by a combination of box-size and reversal rules. More information on this is given in Chapter 11, "Five-Point Patterns."

There are two main scaling techniques for the price axis. By far the most common is arithmetic scaling, where each division on the price axis is equidistant and represents an equal-point amount (Figure 2.6). Far more informative are log scales (Figure 2.7). In this system, sometimes referred to as ratio or semilog scaling, 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. With an arithmetic scale a one-point move at $10 covers the same distance as a one-point move at $100, despite the fact that the