Episode #2 - Tutorial in Technical Analysis by Alan Hull

Alan Hull is a renowned technical analyst within the Australian Market. He has educated thousands of investors on how to apply technical analysis within their overall strategy. In this special series, Alan has agreed to share his Technical Analysis tutorials with Stockopedia members. To learn more about Alan you can read his profile here. Or visit his website alanhull.com.au

---

Trading Volume

Apart from price, there is another primary element that we can also include when analysing charts and that’s trading volume. Trading volume, as the name implies, is the number of shares traded during any given trading period…and not be confused with the value of shares traded. Volume is commonly displayed as a histogram (vertical bars) at the bottom of a price chart. So adding volume into our chart of BHP gives us the following picture which conveys 5 discrete bits of information for each trading period. Opening price, the high, the low ,the closing price and the trading volume…

Candlestick chart of BHP Billiton including volume histogram

To work out the actual number of BHP shares traded in the above chart you need to use a multiplying factor of 100. This is because charting programs will struggle to display the full number of shares traded as it is often very large. So charting programs will divide by a factor of 100 or even 1,000 in order to keep the numbers on the vertical scale manageable. It should also be noted that the actual number of shares traded is of less importance than the direction in which the volume is trending.

Hence the use of the histogram which is highly suited to showing the ‘Rate of Change’ of volume. Again, chartists are more interested in the rise or fall in the trading volume than they are in the actual amount of shares that are traded during a particular trading period. Interpreting volume is a relatively easy matter as it either supports the direction of price movement or opposes it…

• Rising volume & rising price => Strong Bullish signal
• Falling volume & rising price => Weak Bullish signal
• Rising volume & falling price => Strong bearish signal
• Falling volume & falling price => Weak bearish signal

It is also worth noting that the importance of trading volume has become less significant in recent times because of the introduction of algorithmic buying and selling by investors, particularly large institutions. Hence, automated trading programs don’t demonstrate sentiment via trading volumes.

Timeframe

The last key aspect of the basic price chart that we need to consider at this point is the timeframe that we wish to operate in. Charts can be made using different time scales. An intraday trader who buys and sells on the same day can use an intraday chart that has a bar for intervals as small as 1 minute, up to 30 minutes. However the most commonly used timeframes are daily, weekly and monthly…

A typical daily price chart

A typical weekly price chart

A typical monthly price chart

If the timeframe isn’t obvious then the easiest way to determine it is to look at the time scale across the bottom of the chart. You should also note that one trading week is equal to 5 trading days as weekends are not included. Some charting programs may display a blank/null period for Saturdays, Sundays and public holidays but by far the most common practice is to do this for holidays only.

So up until now I’ve often used the generic term ‘trading period’ as opposed to a specific period such as daily, weekly or monthly. Thus in the previous charts of BHP, each trading period (or candlestick if you like) is 1 week, making all of these ‘weekly’ charts of BHP. Thus if we were to use these weekly charts of BHP then it would be said that we are performing ‘weekly’ analysis of BHP.

This sounds ridiculously obvious but it is extremely important that traders and investors are absolutely clear on what trading period they’re using, which is largely determined by the timeframe they are working in. Traders will typically work in a shorter timeframe to investors and will therefore prefer using daily and weekly charts. On the other hand, investors who tend to use more robust technical analysis (to support fundamental analysis) will lean towards weekly and monthly charts.

The good news is that virtually all charting techniques work in any timeframe and so the charting skills and strategies that you will learn by studying these weekly articles are universal in their application. And as you will also discover, many of the different charting tools we use are actually based on just a small handful of very powerful behavioural characteristics. One of the most significant is what chartist’s call ‘moments of agreement’ and this where we will start our discussion next time.

---

Alan Hull’s company ActVest Pty Ltd is a Corporate Authorised Representative (CAR No.306718) of Avestra Capital Pty Ltd AFSL 292 464 ("Avestra"). This document has been prepared for the general information of investors and does not take into account the investment objectives, financial situation and particular needs of any particular person.

Past performance is not a reliable indicator of future performance.

Persons intending to act on information in this document should seek professional advice to confirm that the investments or strategies mentioned are appropriate in the light of their particular investment needs, objectives and financial circumstances prior to taking any action.

While reasonable care has been exercised and the statements contained herein are based on information believed to be accurate and reliable, neither ActVest, Avestra, nor their employees or agents shall be obliged to update you if the information or its advice changes or be liable (unless otherwise required by law) for any loss or damage suffered or caused to any person or corporation resulting from or contributed to by any error or omission from such statements including any loss or damage caused by any fault or negligence on the part of ActVest, Avestra or Stockopedia, whether direct, indirect, consequential or otherwise, whether foreseeable or not.

Direct investing in the stock market can result in financial loss. This document, and any associated files, is intended solely for its intended recipient. The contents are confidential and may be legally privileged.