In technical analysis charting, support and resistance levels are two important parameters to determine entry and exit points, coupled with volume information. This method however, requires some users’ discretion to “draw” the lines on the chart. This could lead to ambiguity. One method to overcome this uncertainty is by using histogram.
Histogram may help the user determine the high frequency of common price points, without relying on a “eye-balling” technique to draw the line. Furthermore, it has an advantage over the line drawing technique, which is the ability to tell the strength of the support or resistance levels.
The other flexibility of histogram is that it can use any parameter of the end-of-day (EOD) data to construct the chart. One may use either daily high or low point, or even both points to build the histogram as long as the information is available.
Technical charts, either candlesticks or bar chart, generally are time based. The histogram is a frequency-based chart, a straight forward tool to identify high occurrence activities. It can be used for other purposes as well such as daily price range target determination, and technical indicators accuracy evaluation.
Chart 1 below shows the volume weighted histogram of weekly closing price of KLCI from June 2009 till August 2018. Clearly from the chart, 1630 is a strong support line. In fact, the post GE14 political uncertainty that caused KLCI to plunge 12% from mid-May to end-of June, found strong support at these regions and subsequently reversed the downtrend. At the time this article was written, KLCI was trading at 1820, the immediate support based on the histogram is 1810. The next resistance line for KLCI is at 1865.
Chart 1: Volume Weighted KLCI Weekly Closing Price Histogram