So what tools does the technical analyst use? The primary tool is a chart of price movement, of which there are varying types. The movement of a security's price is referred to as its price action. Price action is always the primary indicator, with volume a secondary indicator. In the analysis that is relevant to day trading, we use line charts, which display volume at the bottom of the chart. Bar charts are less useful for real-time analysis. And even less useful in intraday charts are candlesticks.

Bar Charting

Bar charts, point and figure, and candlesticks can all come in handy. Bar charts are somewhat different from linecharts. Whereas a oneminute line chart (which I call a one-minute tick chart) will place a point on the chart at the price at which the security last traded within that minute, you will have no knowledge of how the security fluctuated in price during that one-minute period. The bar chart provides that information. The top of the bar represents the high price for that period, the bottom the low price, and the dash on the right-hand side of the bar represents the close. Some charts also show a dash on the left-hand side of the bar to indicate the opening price during that period. These features of the bar chart are shown in the below figure.

When assessing general market conditions, I like to see two, and preferably three, different indicators all agree before I make my decision on where the market is heading.

We do not use indicators of overall market direction to control exactly how we behave. They merely provide a bias for our actions, pointing us toward looking for long opportunities in rising markets and shorting in falling markets. That is not to say that we will not sometimes trade against the prevailing market trend if there is an exceptionally strong movement happening in one security. It just means that we will be more careful about trading against the overall trend.

Candlesticks

Each candlestick is made up of a real body and two shadows, as shown in the below figure. The real difference between this and the regular bar on a bar chart is the information provided by the real body. In the fuigure, the upper end of the real body is marked with the letter A, and the bottom of the real body is marked with the letter B. These represent the open and closing prices for the period the candlestick spans.

If the open is higher than the close for that period, the real body will be black, indicating that prices declined in the course of the day. If the open is lower than the close for that period, the real body will be white, indicating that prices closed higher than the level at which they opened. As we shall see later, it is the combinations of candlesticks that form the useful patterns, not analysis of any single candlestick.

Point-and-figure Charting

The point-and-figure method is a little more difficult to understand, at least initially. Point and figure is a really good method when looking for stocks that may break out, either to the upside or the downside. I have heard of people using intraday point and figure, but I have not done so. Point-and-figure charts will be discussed when we are assessing overall market direction, to give us a bias for the direction in which we will look to trade securities. Again, just as with candlesticks, the point-and-figure information only gives us a bias. Should the price action for a given day contradict the point-and-figure information, we go with that instead. Day traders should always use the day's price action as the primary driver for trading decisions. Should the day's price action disagree with the point-and-figure indicator, the day's price action takes precedence. The basic point-and-figure chart is shown in the below figure.

This is an odd display, no question. It represents price movement only, disregarding both the time element and volume. The vertical axis represents price, and the horizontal axis has no assignment. The concept behind the point-and-figure method is that a column of X's represents a rising trend, and a column of 0's a falling trend. As such, the point-and-figure chart highlights trend reversals and price breakouts very well, in fact, far better than a line or bar chart.

In point-and-figure charting the box size is of paramount importance. In the figure, the box size is one dollar, and we can see the first column is one of X's, indicating that the price moved from 110 to 113 without any fallback. This could have happened over minutes, weeks, or months, because time does not matter in point-and-figure charting. The next feature to note is what degree of retrenchment will cause the chart to reverse into a column of 0's. That is selected, but for argument's sake, let us make it 3, which means a reversal of three box sizes is needed to shift the chart display to the next column on the right.

To make this clearer, let's us look at some data that could be used to generate the display. These figures represent the closing price taken at regular intervals. They could be at the end of the day, a week, every hour, or even every 15 minutes. The rate at which data is collected is the only area where time has an effect on the point-and-figure chart. The first set of data is as follows: 110, 113, 109, 112, 109, 113 Here, a three-point reversal happens after each consecutive data point, which causes a new column to be created. The same display would be generated with the following data. 110, 111, 112, 113, 110, 109, 112, 112, 111, 109, 112, 113 This shows the runup from 110 to 113, which is immediately followed by a three-point reversal to 110, then a further decline to 109. The reversal happens again at 112 and holds there as the price falls to 111. The reversal does not happen until the fall to 109. The final reversal happens with the move to 112, followed by 113.

I have not come across a good source for intraday point and figure, although I would dearly like to, so I cannot use it for timing day trades. However, point-and-figure charting becomes important when it comes to assessing the overall market and sector health of securities.