Chapter 7 of 9
Chart construction, Dow-style trends and honest reference points
Read line, OHLC and candlestick charts while defining trends from information available at the time.
In this chapter
The chart is a representation of data #
A line chart often uses closes; an OHLC bar includes open, high, low and close; a candlestick visualises the same four values differently. More colourful presentation does not add a new observation.
Choose trading session, timezone, interval and adjustment treatment. A five-minute candle and a daily candle describe different sampling. Heikin-Ashi or other transformed charts are not literal executable price bars; label transformations rather than treating every displayed value as a fill.
Describe trend with observable swings #
Dow-style analysis distinguishes broad trend from intermediate corrections and shorter fluctuations, with attention to confirmation and participation. It is a framework for asking questions, not a verified profit guarantee.
Higher highs and higher lows need a reproducible swing definition. A pivot confirmed by bars to its right was not known on the pivot bar. Record the confirmation delay so a backtest does not use future information.
Support and resistance are hypotheses about response #
Define a zone from a declared rule: prior completed highs/lows, a fixed session range or another observable construction. A line drawn after a reversal is descriptive hindsight.
Trendlines and channels depend on anchor selection and tolerance. State whether a break uses a touch, close or distance threshold. Levels can fail and gaps can bypass them; a chart zone is not a guaranteed execution price.
Test the data before testing the pattern #
A split can create an apparent price collapse in an unadjusted series. A futures roll can create a discontinuity unrelated to a new price discovery event. Check duplicate bars, missing sessions and corporate-action treatment.
Use adjusted series for the question they suit and actual contract/share prices for execution modelling. Record rules in words clear enough that another reader can identify the same candidate without seeing the outcome.
Hypothetical worked example
A fictional delayed swing
A swing-high rule requires two lower highs after a candidate high. A high on Monday can only be confirmed after Wednesday’s bar is complete under that rule.
Entering on Monday because the later bars confirmed it is look-ahead bias. An eligible decision begins after confirmation and must use the next permitted execution assumption.
Common mistakes
- Treating a transformed chart value as a guaranteed fill.
- Using future-confirmed pivots at their earlier date.
- Drawing levels only after seeing the reversal.
When is a two-right-bar pivot known?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Desk assignment
What to submit
Specify chart construction, swing confirmation, zone tolerance, adjustment treatment and an execution timestamp.
Use the research ledger for dated evidence, or the module workbooks for calculations. Separate observations, assumptions and interpretation.
Sources and further reading
- NISM: Research Analyst learning topics (scope reference; independent lessons) ↗
- CME Group: technical analysis of commodity prices ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.