Read an Excerpt
Chapter 2: Charts
The opening price need not be recorded. Experience has shown that it seldom, if ever, has any significance in estimating future developments, which is all that ordinarily should interest us. The closing price is important, however. It is, in fact, the only price which many casual readers of the financial pages ever look at. It represents the final evaluation of the stock made by the market during the day. It may, of course, be registered in the first hour of trading, provided no other sales are subsequently effected, but, it becomes, nevertheless, the figure upon which a majority of prospective traders base their plans for the following day. Hence, its technical significance, which will appear in various connotations in later chapters.
Different Types of Scales
Many specific suggestions as to the details of charting are deferred for discussion in the second section of this book, but there is one chart feature which may well be considered here. Until recent years, nearly all stock price charts were kept on the common form of graph paper ruled to what is known as plain or arithmetic scale. But more and more chartists have now come to use what is known as semilogarithmic paper, or sometimes as ratio or percentage paper. Our own experienced indicates that the semilogarithmic scale has definite advantages in this work; most of the charts reproduced in this book employ it. The two types of scale may be distinguished at a glance by the fact that on arithmetic paper, equal distances on the vertical scale (i.e., between horizontal lines) represent equal amounts in dollars, whereas on the semilogarithmic paper, they represent equal percentage changes. Thus,on arithmetic paper the distance between 10 and 20 on the vertical scale is exactly the same as that from 20 to 30 and from 30 to 40. On the logarithmic scale the difference from 10 to 20, representing an increase of 100%, is the same as that from 20 to 40 or from 40 to 80, in each case representing another 100% increase.
Percentage relations, it goes without saying, are important in trading in securities. The semilogarithmic scale permits direct comparison of high- and low-priced stocks and makes it easier to choose the one offering the greater (percentage) profit on the funds to be invested. It facilitates the placing of stop-loss orders. Area patterns appear much the same on either type of paper but certain trend lines develop more advantageously on the ratio scale. Almost anyone can quickly become accustomed to making entries on semilogarithmic paper. We recommend its use. However, its advantages are not so great as to require one to change, who, because of long familiarity and practice, prefers an arithmetic sheet. Such percentage calculations, as may seem to be required, can, after all, be made on another sheet or in the head and the results then entered on the arithmetic chart if a record is desired.
Several firms specializing in the manufacture of graph paper and other engineers' and architects' supplies now offer sheets specifically designed for stock charting, on which heavier lines to define the business week mark each sixth day on the time scale, and the price scale is subdivided into eighths to represent the standard fractions of the dollar in which stocks are traded on all American exchanges. These sheets are available in various sizes and with either arithmetic or logarithmic price and volume scales.
On weekly charts, each vertical line represents a week's trading. The price range for the week is plotted thereon and usually the total volume, but the closing price may be omitted. The range extends, of course, from the highest price at which the stock sold on any day during the week to the lowest price at which it sold on any day; these two extremes might, and sometimes do, occur on the same day, but the weekly chart makes no distinction as to day. Monthly charts are prepared in the same way but do not, as a rule, record volume. These two-often referred to as long-term or major charts-are used chiefly for determining important Support and Resistance Levels and marking long-term trends. Weekly chartsif the reader prefers to keep his own-can be posted easily from the Sunday morning editions of those daily newspapers (e.g., the The New York Times or Barron's Business and Financial Weekly) which publish a summary of the previous week's transactions.
In concluding this chapter on the construction of the charts which we shall study in succeeding chapters, it can well be said that there is no special virtue, certainly no magic, in the chart itself. It is simply a pictoral record of the trading history of the stock or stocks in which we may be interested. To the man possessed of a photographic memory, no chart work is necessary; his mind records all the necessary data-he carries his charts in his head. Many of the expert "tape-readers" who have no use for charts are gifted with that rare memory talent which renders reference to graphic records unnecessary. But most of us are not so blessed; to use the chart is necessary and useful because it lends itself conveniently to the type of analysis which indicates future probabilities.
There is a saying on Wall Street to the effect that "there is nothing wrong with charts-the trouble is with the chartists." Which is simply another way of expressing the truth that it is not the chart itself but its interpretation that is important. Chart analysis is certainly neither easy nor foolproof. Yet, it is not at all uncommon for some casual investor who has no idea whatever of market technics to pick up a chart by chance and see in it something which he had not hitherto suspected-something perhaps which saves him from making an unfavorable commitment.
If you have never used stock charts, never paid much attention to them, you may be surprised at some of the significant things you will quickly detect as soon as you begin to study them seriously...
