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ProSticks - Learning Curve
Hong Kong Economic Time --- June 14, 2000
How to detect technical trap using Active Range?
The most distinctive feature in both a ProSticks and a Candlesticks bar is the
presence of a rectangular body on the bar. However, the content of the body
differs dramatically. For a Candlesticks bar, the body represents the distance between the open
and close prices. If the body is long, we know that the market closed well
above or below the open. On the other hand, for a ProSticks bar, the body represents
volume. If the body is long, it means that the volume was evenly distributed along
the bar range. If the body is short and skewed, it means that the volume was mostly
concentrated on a specific range throughout the bar. The market, for that particular time period, can be seen as
one that lacked strength.
The volume and the price must be analyzed together. Conventional wisdom dictates
that if the price surged or dropped without being accompanied by volume, the trend is
not sustainable.
Figure 1 shows the Candlesticks chart for SHK Properties (016). Notice that at
A, the price rose more than 5% for the day, and closed well above the 20 Day Moving
Average, signifying bullishness. Unfortunately, the downtrend resumed the following days
and the price fell to a low of 42 in May (not shown in chart).
Figure 2 shows the corresponding ProSticks chart of the same stock. Notice that at
A, though the price rose significantly that day, the surge was not accompanied by volume.
Most of the volume was concentrated at the lower price levels of that day and below the Moving
Average line. Thus, while the Candlesticks chart exerts a bullish signal,
our ProSticks chart does not.
Notice that on the day following A, the price opened near the middle of the previous day's Active Range,
indicating that the strong rally at A may be due to market overreaction. The
underlying fundamentals of the market has not changed. Our ProSticks chart provides
this type of insight which is not available through any other chart.
The Active Range is calculated from a frequency distribution diagram using
Statistical theory. In short, it encompasses approximately 68% of the total
trading activities. Those who are familiar with the Market Profile theory will
realize the Active Range is simply the value area in the profile diagram.
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