In last post in this section, i introduced you to different types of charts used for analysis and now we will go through some factors that should be considered while constructing charts.
- Arithmetic versus Logarithmic Scale
Charts can be plotted using either arithmetic or Logarithmic scale. Difference would be spotted on Y-axis where there will be equal spacing between each unit in Arithmetic scale while there will be equal spacing in percentage terms in Logarithmic scale. So a move on arithmetic charts from 5-10 would equi-distance to 50-55 while on Logarithmic scale, 5-10 move would be equi-distance to 50-100 where both means 100% move in the price. So for larger trend or long price move history Logarithmic scale would be more preferable for analysis.
Volume is one of the most crucial information after price on charts required for analysis. It represent the total amount of trading activity in that asset on that particular time frame taken under analysis. It is represented by a vertical bar at the bottom of any chart drawn. A higher bar means the volume was heavier for the day and vice-versa. And as Dow Theory suggest volume confirmation is more important with the price so you must strictly consider volumes while technical analysis.
- Future Open Interest
Open interest in the future segments is the total number of outstanding or open future contracts that are held by market participants in secondary markets. They can be either longs or shorts or both.
So now you are aware of basic points which are considered along the price for construction of charts. We will explain all the points in detail in future post but should remember all factors while we take other crucial concepts.