You wouldn’t think that price would merit its own post, but you have to start at the beginning. Price and volume, which we’ll discuss next are the two major components of charts. All the other data is a derivative of these two pieces of data. Price data however is not a simple number. Typically in technical analysis you deal with four distinct price numbers:

• Open
• High
• Low
• Close

These four numbers are fairly self explanatory, but let’s go over them quickly anyway.  Open is the price at which the issue trades during a given time period.  High is the highest price at which an issue trades during a given time period and low is the lowest.  Close is the final price of the stock during the time period.

You’ll notice that in this discussion I speak in terms of time periods in a general sense.  That’s because charts can have any level of granulatrity.  In an intra-day chart, the period in question may be an hour or even in some cases a smaller fraction of time.  In other charts, the same time period could be a day or a week or even a month.  In any of these cases, however you can still have an open, a high, a low and a closing price.

When charting these prices, you can represent these values in many ways.  Probably the most common type of chart is a bar chart.  In these types of charts, each period is represented by a bar.  The bar stretches from the period’s low to it’s high.  It also has a tick on the left side for the open and a tick on the right side for the close.  There are other types of charts, which we will discuss later.

The price is probably the most important component of any analysis, but it isn’t the only one.  Without understanding volume, which we will discuss next, the price data can be misleading.

Price Data From a Bar Chart

2009 has gotten me this way a couple of times. The problem is that I genuinely believe we’re in circumstances unlike any we’ve seen before.  This causes me to “rethink” things far too often for my own good.  Here’s a typical example of what I’ve done a couple of times.  I decided at one point to go long TLT (Long Term Treasuries) as a hedge against some other positions.  I sold a call off the position as well to limit my downside.  The plan was if the trade moved the other way I would double up the position to increase my exposure and even out the hedge.

So of course TLT has a huge downward move, much larger than I expected.  I start thinking about the economy and I get worried and I decide just to let my current position ride instead of doubling up.  Of course TLT recovers part of the way.  Had I doubled up my position as I had planned when I entered the position, that trade would have become a neutral one.  Instead it was quite a loser and offset the gain in the position it was hedging.

I committed similar folly with a position in energy stocks.  Basically I keep convincing myself that the unprecedented market conditions overcome my plan.  Don’t get me wrong, it’s fine to decide that unanticipated news has affected your plan. But when this happens, you need to close out your position, take a step back and decide what makes sense. Instead I tookthe “middle ground” and start improvising and making it up as I go.  This is completely self destructive.  Once you have a plan, you stick with it.

Read more about psychology in my Trading Psychology feature.

Photo Credit: George E. Norkus