Key Technical Analysis Factors

The following is an explanation of the relevant key factors during your analysis of technical stock charts.

Period

As previously stated, the x-axis denotes the time period and typically is referred to by most technical analysts as a ‘period’. A period can vary between intra-day, daily, weekly, monthly, quarterly, semi-annual and annual time periods and any variation in between. The most common type of chart is the End of Day or Daily chart, whereby prices are populated as an aggregate across a day such that the highest price reached during the day will be the upper point on the bar, the lowest price reached during the day will be the low point on the bar and so forth.

While this concept may seem basic to some, it is important to understand the differences when moving to other periods. When using intraday periods for example, the high, low, opening and closing prices seen on the bar are price only for the time period in examination. Thus, a 15 minute period bar will only represents all the price movement within the 15 minute interval. It is important to understand this distinction as many traders become confused when dealing with multiple period movements.

It is even more critical to know what time period you are trading, if trading on an intra-day basis. The difference between a 5 & 10 minute period can be massive if you think you are trading in one time period, and you are in fact in another. Indicators and tools are all read according to the time period you are in, and mistaking a time period can be devastating to your overall trading strategy if you are not familiar with it.

Opening Price

The opening price is often one of the most important features on any bar chart as it reflects over sentiment and can immediately indicate the position of your trade in the market. In some circumstances, the opening price of a stock is not available and typically most stock software will generate a synthetic opening price based off the following factors:

• If the previous close is within the range of the current period, the previous close is substituted for the opening price
• If the previous close is above the range of the current period, the high of the current period is substituted for the opening price
• If the previous close is above the range of the current period, the low of the current period is substituted for the opening price

It is critical to remember how the price is being calculated by automated trading software because it can often mislead your trading strategies if you are unsure of the exact closing price. That said, it is often better to consult other sources to get an accurate opening price if available.

Closing Price

Most software will always chart the last sale of any trading period and this is represented on the chart itself. It is important to note that if you are trading futures, that the last charted price is often the settlement price which is the average of the bid and ask prices for the period.

Volume and Open Interest (OI)

Volume is always typically represented as the trading volume of securities in any one period for a particular security. It is important to note that the value of securities traded can sometimes also be used or the number of changes in price – aka ‘tick’ data – in the instance where the number of securities traded is unavailable.

Volume is always lagging data because unlike price, it is usually never updated immediately and this can often lead to trading mistakes if volume is relied on entirely without any confirmation with other indicators.

In futures markets the problem becomes more complex when multiple contracts are being traded on the one instrument which implies that the volume and open interest used can be for just single contract on the chart, or for all contracts currently traded.