Technical Analysis

The Basics

The basis for all technical analysis is five pieces of data. Each can exist for any time period, although it is normal to consider them daily. Those pieces of data are:

  • open
  • high
  • low
  • close
  • volume

(Another is open interest, a figure used when trading some derivative products, eg. futures and options.)

In other words, for every day for example, each stock will have an opening price, the highest price it has reached for the day, the lowest price it has reached for the day, the closing or last traded price for the day and the volume.

Some companies will go day after day and not have any trading. This isn’t the fault of the company directly; it is the market. This means that not one person initiates a buy or sell order for shares in that company for that day. Also, you may have companies that only have 1 trade throughout the day – in this case, the opening price is the same as the high, the low and the closing price.

Here is a simple example you will see of the price data for a stock for a particular day.

Date Open High Low Close Volume
30/06/2007 5.30 5.38 5.28 5.34 1589450

To conduct effective technical analysis, many people will ‘chart’ this data. A chart is a graphical depiction of the data, plotting price (Y-axis) over time (X-axis). An example of a chart is shown below.

This is a chart of the largest mining company in the world – BHP Billiton (ASX Code: BHP).

All of the hundreds of indicators and various technical analysis methods use nothing else but these five pieces of data. Technical indicators perform a whole host of mathematical calculations in order to interpret market data in different ways and better understand the stock market.

Now, let’s look at the table of data again.

Date Open High Low Close Volume
30/06/2007 5.30 5.38 5.28 5.34 1589450

Can you imagine a much longer table with data like this above for every single day of a stock’s trading history. Furthermore, you would have a table like that for every stock traded on the market.

To conduct any form of analysis using a table of numbers like this would prove to be very inefficient and tiresome. This is why charts are so widely used. A chart will graphically depict the data for an individual stock. (We use charts for other things too like currencies, indices and others)

Using the table of information above, we can graphically represent it using a bar, as shown below.

Notice how the high and low of the central vertical line, line up with the high and low information shown on the Y-axis which displays the price information. Also, you will note the small horizontal line out on the left which lines up with 5.30 (the opening price) and the horizontal line on the right lines up with 5.34 (the closing price).

Next, this information can be displayed using candlesticks, as shown below.

This candlestick is displaying the same data as the bar above except it is different in the way it displays the data. The high and low extremes still represent the high and low prices for the period, except it is the manner in which the opening and closing prices are being represented.

The large part of the candlestick is known as the body and its ends represent the opening and closing prices. The only problem is working out which end is which.

As candlesticks have been widely used since the 17th century, most charting software today has the ability to show candlesticks in their charts. You just need to know the method your charting software uses.

In this particular case, as the body is hollow (not filled in), it means the stock has closed higher than where it opened for the period of time the candlestick is showing.

If however, the opening price was 5.34 and it closed down at 5.30 for the period, the candlestick body would be filled in and look like this.

Something that makes it easier for us is that often, candlesticks will also be coloured to represent up and down movement. Commonly, a green candlestick represents up and red represents down.