Histogram

In technical analysis charting, support and resistance levels are two important parameters to determine entry and exit points, couple with volume information.  This method however, requires some user’s discretion to “draw” the lines on the chart, which may lead to ambiguity.  One the method to overcome this uncertainty is using histogram.

Histogram can help the user to determine the high occurrence common price points, without relying on “eye-balling” technique to draw the line.  Furthermore, it has one advantage over the line drawing technique, which is the ability to tell the strength of the support or resistance levels.

The below Chart 1 shows the histogram of daily closing price of FTSE KLCI from Jan 2006 till Jan 2016.  Clearly from the chart, 925 is a strong support or resistance.  The second strong support or resistance level is 1275; the third strong support or resistance level is 1810 while the fourth strong support or resistance level is 1565.  This chart however, does not include the volume information.

Chart 1

The below Chart 2 is the volume weighted histogram, where the volume information are blended with the closing price.  It is a better option because it helps to filter out the closing prices that have low volume.  Though the top 2 strongest support or resistance levels 925 and 1275 remain unchanged, there are slight changes on the third and fourth strongest support or resistance levels, which are now become 1820 and 1560 respectively.  Other subsequent support or resistance levels also become more distinctive.

Chart 2

The other flexibility of histogram is that it can use any parameter in the end-of-day (EOD) data to construct the chart.  One can use either daily high or low point, or even both points to build the histogram as long as the information is available.

Unlike technical charts, either candlesticks or bar chart, which are time based.  The histogram is a frequency based chart, a straight forward tool to identify the high occurrence activities.  It can be used for other purposes as well such as daily price range target determination, and technical indicators accuracy evaluation.