Chapter 1 Graphical Representation
1.1 Zig-Zag
The simplest graph is the so-called zig-zag, obtained by joining with a segment the prices (usually the closures) of the securities or contracts recorded at fixed intervals of time (1 day, 5 min etc.) (Fig. 1.1).
The main effort made by the trader when he reads a zig-zag graph consists in trying to understand what the underlying trend is, i.e., in trying to separate the random oscillations (that may be called the noise) from the underlying regular trend to which they are superimposed. We will see along all this book that this is the problem of technical analysis, and of investing in general.
It often happens to read that small changes in price that happen from one bar to the other can be filtered out because they are not significant.
If you draw a real graph1 that uses this protocol2 applied in a manner so naive, we see that this kind of operation is substantially detrimental rather than beneficial.
In the graph in Fig. 1.2, the closures of the FTSE MIB index of the Italian bourse are reported, as well as the same closures, but without the changes3 in price of less than 0.5 %.
As one can see, the net effect is that of having a graph more readable but delayed, which is exactly what we do not need because our problem is almost always to be timely. Timing is all, as they say.
One might think that the delay effect is reduced by using a filter with a threshold much lower, for example not taking into account variations inferior to only 0.1 %, but it is not so (Fig. 1.3).
1 See the worksheet Filtered graph
2 A protocol is a set of rules or concepts to be followed for a particular purpose, such as a medical treatment to cure a disease.
3 From the closure of the current bar to the closure of the previous bar. The adjusted close (AC) is the closure adjusted for stock splits, dividends etc.
R. Di Lorenzo, Basic Technical Analysis of Financial Markets, Perspectives in Business Culture, DOI: 10.1007/978-88-470-5421-9_1, © Springer-Verlag Italia 2013
Filtered graph
21,500.00
21,000.00
20,500.00
20,000.00
19,500.00
19,000.00
22,000.00 14 710131619222528313437404346495255586164677073767982
Adj Close Filtered A.C
The delay persists, and the graph maintains a zig-zag behavior which is very annoying.
One might also think that the variations to be filtered out are not those from the closure of a bar to the closure of the previous one, but those from the closure of a bar to the closure (for example) of 5 bars before… but also in this case the result is disappointing (Fig. 1.4).
As can be seen, in some areas of high volatility (where there is a trend) there is no filtering at all, while in some areas of low volatility (i.e., substantially during sideways movements) there is a filtering action but there also appears a sound delay.
Fig. 1.1 The Nasdaq. Source Yahoo
Fig. 1.2 Filtered graph
1.1 Zig-Zag
Filtered graph
1.3 Filtered graph
Filtered graph
1.4 Filtered graph
This is not the way to go, then.
A type of filter that is very basic but that has the advantage of being immediately interpreted, consists in coloring in a different way the segments of the zigzag graph with closures upward and those with closures downward.
Fig.
Fig.
Here is an example (Fig. 1.5).4
Obviously, changing the time span—namely the period of time elapsing from one observation to the other—and changing it from daily (an observation per day) to weekly (one observation per week, of course the same day of the week and at the same hour every time) one gets the same glance but the uptrends and downtrends are decoded by the eye in a more efficient way (Fig. 1.6).
4 The printed page will show the different segments in different shades of gray.
Fig. 1.5 Ftse Mib. ProRealTime platform
Fig. 1.6 Ftse Mib. ProRealTime platform
The protocol just described, i.e., moving from a daily to a weekly chart, is definitely a way to filter the signal, because it eliminates the more hysterical fluctuations that occur from day to day.
An even greater filtering effect is achieved by using a monthly chart, that is, one that reports only one observation each month (the same day of the month at the same time, of course) (Fig. 1.7).
However, it should be noted that, by switching to a monthly sampling—for example with observations recorded on the last Friday of the month at close—to be able to add a point to the graph one needs each month to wait for that day and hour, and then one will suffer a blackout every month of at least 15 days on average, which is definitely too much for any form of trading you want to use unless position trading.5
1.2 Bar Charts
The standard format with which the financial data are presented is shown in Table 1.1.6
The graphs seen so far, as mentioned, are said to be of a zig-zag type and the reason is obvious as they show just one of the four available values, normally the adjusted closure.
5 In position trading one buys a security and keeps it for a long time, but he has opened such a position for reasons that normally have nothing to do with technical analysis. See also: Di Lorenzo R., How to make money by fast trading, Springer-Verlag, 2012.
6 They can be downloaded from various sites on the Internet, typically Yahoo. The daily data are normally free.
Fig. 1.7 Ftse Mib. ProRealTime platform
Table 1.1 Standard form of financial data
Fig. 1.8 EUR/USD. ProRealTime platform
On the contrary, both the bar chart and the candlestick chart exploit all the four values: Open, High, Low, and Close in a way now well-known almost by anyone (Fig. 1.8).
In the bar chart, the opening is indicated by a tooth facing left and the closure from a tooth facing to the right, while the vertical bar goes from the maximum to the minimum quotes achieved during the session.
The vertical bar is usually colored red (or white, if the background allows) if the session has been downward (i.e. close < open) and green (or black) if the session has been upward (close > open).
It is obvious that the amount of information transmitted by these two types of charts, compared to a zig-zag chart, is much greater.
1.3 Candles
In the Japanese Candlesticks chart, the information used are the same as in the bar chart, only made more evident by the conformation of the drawing (see Fig. 1.9).
The two thinner parts facing upward and downward (the rovings, so to say) are called shadows and mark the maximum and the minimum quotes reached during the course of the session, while the thickest part (the candle itself, or body) goes from opening to closing. The colors used are the same as for the bar graph.
The length of the bar or candle is variable: daily if the session is a day, or 15 min, or an hour, or 1 month… what you want.
1.4 Candlevolume
The Candlevolume graph is a normal candlestick chart, but to it an information that we have not used—the volume7—is added in some way.
I remind that the standard form of representation of the volumes consists of a histogram added in the lower window of the chart, like in Fig. 1.10.
7 The volume is the number of Securities exchanged during the session.
Fig. 1.9 EUR/USD. ProRealTime platform
1.11 Unicredit. ProRealTime platform
How then can we add the volumes directly on the price chart rather than in a separate window?
There is no other option than to incorporate them into the candle by varying its width.
Each candle body, therefore, will present a width proportional to the volumes exchanged during the session (Fig. 1.11).
Fig. 1.10 Mediaset. Source Yahoo
Fig.
The meaning of the volumes in terms of trading is very controversial, and we will deal with it for a long time. In any case, no doubt that there are situations in which whether or not there has been an increase in the number of trades is important, typically, as we shall see, the breakout from a figure (e.g., a triangle or a head and shoulders…). In this case, the graph Candlevolume provides this information in an immediate way. Apart from these cases, however, not always (for example) a long candle—i.e., one with a very long body, index of a market that desires to move in one direction or another—associated with high8 volumes is necessarily an effective signal.
1.5 Equivolume
The graph Equivolume is very similar to the Candlevolume, but it takes into account only the maximum, minimum, and the volume of the session: open and close are not reported. Then one draws simple rectangles, or boxes, instead of candles. The height of the box represents the so-called range, equal to the difference between the maximum and the minimum quotes reached during the session, and it has to do with a measure of volatility. In the absence of an indication of the fact that the session has been upward or downward (because one lacks the open and close information), it makes up for coloring the edges of the boxes: green (or clear) for the sessions on the upside and red (or black) for the downward sessions (Fig. 1.12).
8 It is therefore a candle long and wide at the same time.
Fig. 1.12 Intesa. ProRealTime platform
Introduced by Richard W. Arms in 1967, in this type of graph the width of a box represents a percentage, precisely, the volume traded in the course of that candle—or session or bar—divided by the total volume traded on that security in the course of the session. According to Arms, the shape of each box tells a story: namely, boxes short and broad—that represent high volumes without substantial price changes—tend to occur in the turning points, i.e., when a lateral movement or trend in a certain direction (for instance upward) is becoming a trend in the opposite direction (e.g., downward), while tall and narrow boxes (which show a great variation of prices on low volumes) tend to occur in long-lasting trends. Here is an example from his bibliography (Fig. 1.13).
Arms seems then to suggest that a breakout (i.e., the outburst from an area of support or resistance—see below) to be valid—i.e., to be the start of a powerful movement—should be represented by boxes high and wide that he called power bars or power boxes.
In general:
• power boxes that are very wide and at least as high, indicate a strong momentum in the market (bullish or bearish);
• the narrow boxes, instead, are high and narrow and occur especially in the phases of continuation of the trend;
• the square boxes are… square boxes and indicate a great indecision in the market;
• the oversquare boxes are wider than high, and represent a lack of direction in the market.
It is quite obvious that, both in the Equivolume and in the Candlevolume graphs, the time axis is deformed: dilated at high volumes and compressed at low
Fig. 1.13 Philip Morris. Source armsinsider.com
volumes, but this is usually neither a handicap nor a particular advantage: only it appears more or less useless on these two graphs to plot lines of resistance and support (see below) precisely because of the deformation of the time axis.
1.6 Point and Figure
Another representation of the price chart is the Point and Figure. Also in this representation the time axis is deformed, so that there is no more compliance with the axis of the true time. However in the Point and Figure graph, support and resistance straight lines (see below) are nevertheless drawn because this is a representation with a high filtration capacity and then these lines retain their ordinary meaning.
It is a graphical analysis method invented in the late 1800s. It is reported that Charles Dow in person talked of it in a number of his Wall Street Journal in 1901, calling it Book Method. Apparently, the name Point and Figure seems to have been coined in 1933 by a certain Victor de Villiers.
Here is the general aspect of this representation (Fig. 1.14).
The downward movements are identified by a column composed of circles O, while the upside movements are identified by a column of crosses ×.
Price changes (upward or downward) below a certain amount (the threshold is called box size) are removed. The standard dimensions of the box size, more or less accepted in practice, are shown in Table 1.2 in relation to the price range of the security.
Fig. 1.14 Coca Cola (KO). ProRealTime platform
A more modern way to determine the dimension of the box size is to equal it to the average true range (ATR). In the Appendix, there is the explanation of what the ATR is and how to calculate it, if necessary using a standard platform as ProRealTime.
Following the instructions in the Appendix, the Generali shares at the time of writing have a value of the ATR, and then of the box size, of 0.4918, while the price is 13.26. Using the conventional table reported above, the box size should be 0.5, not very different from the value calculated via the ATR.
However, in Fig. 1.15 the ATR is shown in the bottom window, which shows that the coincidence between the two values that we found in this case is just a coincidence. Ultimately, in this case all the variations in the price of less than about 2 % should be skipped. If one can calculate the ATR, this is a more accurate and
Fig. 1.15 Generali. ProRealTime platform
Table 1.2 Box size
precise procedure, but if one cannot do it, also the use of the conventional table shown above can be fine.
But be careful: the conventional table applies only to daily charts; graphs for longer periods (e.g., weekly, monthly etc.) or intraday charts (15 min, an hour, etc.) require a calculation of the correct ATR value.
It is in fact immediately apparent, for example, that, in the case of the Generali just examined, a 2 % variation from bar to bar would be far too high to be used with a 15 min sampling rate.
In a Point and Figure chart, the rising prices will be shown, as mentioned, in the columns with the crosses ×, while the falling prices will be reported in the columns with the Os.
To each column of crosses × will succeed to the right a column of O, then the graph will continue with another column of × to the right, and so on in alternate columns.
If the price change from the current bar to the previous bar will amount to n × ATR in the same direction (upward or downward), we will add n more boxes to the column in the same direction: we will mark an × at the top of the column or and O at the bottom of it, depending on whether it is a bullish or a bearish movement.
For n < 1 we will not add any box; for other values of n, they will be rounded to an integer with the usual conventions for rounding. Each time the price will move in the opposite direction with regard to the previous trend, a new column will be added to the right of the current column, but leaving void the box adjacent the last box of the column just completed.
The best way to explain this, is to inspect closely and attentively a graph (Fig. 1.16).
Fig. 1.16 Generali.
The new column will not be drawn immediately, however, but one will wait, with the prices that continue in the trend in force, until at least 3 crosses × or 3 Os can be drawn.
In this way, it is said that we have a box reversal of 3.
Other popular box reversal are 1 or 5.
In the figure for the Generali just reported, we have used a box reversal of 3 and a box size of 2 %.
Note that, in some platforms, for box size it is used the expression format of the box, and for box reversal may be used the phrase threshold rebound.
It is also true that on the same platforms, one can normally choose the prices on which to make the counts: closure, minimum, maximum, etc.
1.7 Kagi
The Kagi9 chart is very similar in concept to the Point and Figure chart. It comes not with circles, crosses, and boxes, but with vertical lines (connected by short horizontal segments) that are thin or thick, or just of a different color, which replace the columns of crosses and circles, like in Fig. 1.17.
Just for a curiosity, let us also report the same graph in standard candles form (Fig. 1.18).
Fig. 1.17 Lottomatica. ProRealTime platform
9 http://www.grtrends.com/sg/sg_grafici_Kagi.html
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The Project Gutenberg eBook of Isis unveiled, Volume 1 (of 2), Science
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Title: Isis unveiled, Volume 1 (of 2), Science
Author: H. P. Blavatsky
Release date: August 7, 2022 [eBook #68705]
Language: English
Original publication: United States: J. W. Bouton, 1878
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Transcriber’s Notes
Obvious typographical errors have been silently corrected. Variations in hyphenation have been standardised but all other spelling and punctuation remains unchanged with the exception of Greek and Hebrew which have been extensively corrected. The corrections are listed at the end of the book.
The cover was prepared by the transcriber and is placed in the public domain.
I U : A MASTER-KEY
TO THE M A M
SCIENCE AND THEOLOGY.
BY
PREFACE.
The work now submitted to public judgment is the fruit of a somewhat intimate acquaintance with Eastern adepts and study of their science. It is offered to such as are willing to accept truth wherever it may be found, and to defend it, even looking popular prejudice straight in the face. It is an attempt to aid the student to detect the vital principles which underlie the philosophical systems of old.
The book is written in all sincerity. It is meant to do even justice, and to speak the truth alike without malice or prejudice. But it shows neither mercy for enthroned error, nor reverence for usurped authority. It demands for a spoliated past, that credit for its achievements which has been too long withheld. It calls for a restitution of borrowed robes, and the vindication of calumniated but glorious reputations. Toward no form of worship, no religious faith, no scientific hypothesis has its criticism been directed in any other spirit. Men and parties, sects and schools are but the mere ephemera of the world’s day. T , high-seated upon its rock of adamant, is alone eternal and supreme.
We believe in no Magic which transcends the scope and capacity of the human mind, nor in “miracle,” whether divine or diabolical, if such imply a transgression of the laws of nature instituted from all eternity. Nevertheless, we accept the saying of the gifted author of Festus, that the human heart has not yet fully uttered itself, and that we have never attained or even understood the extent of its powers. Is it too much to believe that man should be developing new sensibilities and a closer relation with nature? The logic of evolution must teach as much, if carried to its legitimate conclusions. If, somewhere, in the line of ascent from vegetable or ascidian to the noblest man a soul was evolved, gifted with intellectual qualities, it cannot be unreasonable to infer and believe that a faculty of
perception is also growing in man, enabling him to descry facts and truths even beyond our ordinary ken. Yet we do not hesitate to accept the assertion of Biffé, that “the essential is forever the same. Whether we cut away the marble inward that hides the statue in the block, or pile stone upon stone outward till the temple is completed, our NEW result is only an old idea. The latest of all the eternities will find its destined other half-soul in the earliest.”
When, years ago, we first travelled over the East, exploring the penetralia of its deserted sanctuaries, two saddening and everrecurring questions oppressed our thoughts: Where, who, what is GOD? Who ever saw the immortal SPIRIT of man, so as to be able to assure himself of man’s immortality?
It was while most anxious to solve these perplexing problems that we came into contact with certain men, endowed with such mysterious powers and such profound knowledge that we may truly designate them as the sages of the Orient. To their instructions we lent a ready ear. They showed us that by combining science with religion, the existence of God and immortality of man’s spirit may be demonstrated like a problem of Euclid. For the first time we received the assurance that the Oriental philosophy has room for no other faith than an absolute and immovable faith in the omnipotence of man’s own immortal self. We were taught that this omnipotence comes from the kinship of man’s spirit with the Universal Soul—God! The latter, they said, can never be demonstrated but by the former. Man-spirit proves God-spirit, as the one drop of water proves a source from which it must have come. Tell one who had never seen water, that there is an ocean of water, and he must accept it on faith or reject it altogether. But let one drop fall upon his hand, and he then has the fact from which all the rest may be inferred. After that he could by degrees understand that a boundless and fathomless ocean of water existed. Blind faith would no longer be necessary; he would have supplanted it with knowledge. When one sees mortal man displaying tremendous capabilities, controlling the forces of nature and opening up to view the world of spirit, the reflective mind is overwhelmed with the conviction that if one man’s spiritual Ego can do this much, the capabilities of the F S must be
relatively as much vaster as the whole ocean surpasses the single drop in volume and potency. Ex nihilo nihil fit; prove the soul of man by its wondrous powers—you have proved God!
In our studies, mysteries were shown to be no mysteries. Names and places that to the Western mind have only a significance derived from Eastern fable, were shown to be realities. Reverently we stepped in spirit within the temple of Isis; to lift aside the veil of “the one that is and was and shall be” at Saïs; to look through the rent curtain of the Sanctum Sanctorum at Jerusalem; and even to interrogate within the crypts which once existed beneath the sacred edifice, the mysterious Bath-Kol. The Filia Vocis—the daughter of the divine voice—responded from the mercy-seat within the veil,[1] and science, theology, every human hypothesis and conception born of imperfect knowledge, lost forever their authoritative character in our sight. The one-living God had spoken through his oracle—man, and we were satisfied. Such knowledge is priceless; and it has been hidden only from those who overlooked it, derided it, or denied its existence.
From such as these we apprehend criticism, censure, and perhaps hostility, although the obstacles in our way neither spring from the validity of proof, the authenticated facts of history, nor the lack of common sense among the public whom we address. The drift of modern thought is palpably in the direction of liberalism in religion as well as science. Each day brings the reactionists nearer to the point where they must surrender the despotic authority over the public conscience, which they have so long enjoyed and exercised. When the Pope can go to the extreme of fulminating anathemas against all who maintain the liberty of the Press and of speech, or who insist that in the conflict of laws, civil and ecclesiastical, the civil law should prevail, or that any method of instruction solely secular, may be approved;[2] and Mr. Tyndall, as the mouthpiece of nineteenth century science, says, “... the impregnable position of science may be stated in a few words: we claim, and we shall wrest from theology, the entire domain of cosmological theory”[3]—the end is not difficult to foresee.
Centuries of subjection have not quite congealed the life-blood of men into crystals around the nucleus of blind faith; and the nineteenth is witnessing the struggles of the giant as he shakes off the Liliputian cordage and rises to his feet. Even the Protestant communion of England and America, now engaged in the revision of the text of its Oracles, will be compelled to show the origin and merits of the text itself. The day of domineering over men with dogmas has reached its gloaming.
Our work, then, is a plea for the recognition of the Hermetic philosophy, the anciently universal Wisdom-Religion, as the only possible key to the Absolute in science and theology To show that we do not at all conceal from ourselves the gravity of our undertaking, we may say in advance that it would not be strange if the following classes should array themselves against us:
The Christians, who will see that we question the evidences of the genuineness of their faith.
The Scientists, who will find their pretensions placed in the same bundle with those of the Roman Catholic Church for infallibility, and, in certain particulars, the sages and philosophers of the ancient world classed higher than they.
Pseudo-Scientists will, of course, denounce us furiously.
Broad Churchmen and Freethinkers will find that we do not accept what they do, but demand the recognition of the whole truth.
Men of letters and various authorities, who hide their real belief in deference to popular prejudices.
The mercenaries and parasites of the Press, who prostitute its more than royal power, and dishonor a noble profession, will find it easy to mock at things too wonderful for them to understand; for to them the price of a paragraph is more than the value of sincerity. From many will come honest criticism; from many—cant. But we look to the future.
The contest now going on between the party of public conscience and the party of reaction, has already developed a healthier tone of thought. It will hardly fail to result ultimately in the overthrow of error and the triumph of Truth. We repeat again—we are laboring for the brighter morrow.
And yet, when we consider the bitter opposition that we are called upon to face, who is better entitled than we upon entering the arena to write upon our shield the hail of the Roman gladiator to Cæsar: M S !
New York, September, 1877.
