It All Begins With Charts

Price charts are the oldest form of technical analysis. A chart is simply a picture of price history. As market opinions are expressed in trading decisions and those decisions shift, prices shift. Chartists theorize that as more prices are plotted, recognizable patterns and formations evolve. The technician surmises how the current market may perform by how it performed under similar technical conditions in the past.

Bar charts are by far the most common type of price charts. In a bar chart, each time period is represented by a vertical line that ranges from the low to the high of that time period. The opening value is recorded as a small notch on the left and the closing value is a similar notch to the right of the vertical line. The daily bar chart is most useful for trading purposes, but bar charts for longer data periods provide extremely important perspectives. These longer-period bar charts (e.g., weekly, monthly) are entirely analogous to the daily bar chart, with each vertical line representing the price range along with the beginning and final price level for the period.

It is generally considered that the close is the most important trade of the time period. The last trade of the day is recorded on the daily bar chart, while the last trade of the week is recorded on the weekly bar chart and the last trade of the month is recorded on the monthly bar chart. Thus, the bar charts quickly show where the close is and how it relates to previous closes of the same time periods. The longer amount of time in each bar, the more significant the close. For instance, funds will certainly monitor daily close activity, but will place much more emphasis on the weekly close because it represents more time and gives more indication to the longer term trend.

Most traders will agree that while they use the daily charts to fine tune their analysis, it is imperative to know what the longer term charts are showing as well, which can look substantially different from the shorter term daily chart. Figures 1, 2 and 3 show how the current soybean market looks from the short term perspective to the long term. Figure 1 is the daily March '00 Soybean chart, showing an impressive move up over the last couple of months. The weekly chart in Figure 2, shows the last few years and how the daily rally pales in comparison to historical levels. And in Figure 3, we can really put recent activity into perspective as compared to the last 25 years.