Money, money, money! It is all about prices, even in the stock market. A good stock can be loss-making if you buy it at the wrong price. For this you need to know what is a chart.
Technical analysis is all about getting the price right. It even plots market trends using stock prices. All this action, though, happens in a place called ‘stock market chart’.
Analysis of market trends is the first tool that is used in technical analysis. However, trend analysis cannot be done unless historical stock charts are available. This is because trends are discovered in the charts themselves. It is, therefore, critical to understand what is a chart and how to perform stock chart analysis to excel at technical analysis.
In this section, we will understand what is a chart and also briefly discuss stock charts. We will also understand what trend lines are and how they can be combined with stock charts to make useful deductions about stock prices movements.
What is stock market chart
As we discussed earlier, trying to perform technical analysis without using stock charts is like trying to build a house without owning land! So we must try to understand how to read the charts. But before we get to that, let’s try to answer the question, what is a stock market chart?
Put in the simplest possible terms, it is a graphical representation of how a stock’s price or trading volumes have changed over time. This relationship can be presented in a number of ways, through the use of different types of charts. It is your job, as a technical analyst, to identify the type that will bring out a hidden trend most effectively
Stock market chart , like all other charts, have two axis—the vertical axis and the horizontal axis. The horizontal axis represents the historical time periods for which a technical chart has been constructed. The vertical axis displays the stock price or the trading volume corresponding to each period.
There are many types of stock market chart that are used for technical analysis. However, the four types that are most common are—line chart, bar chart, point and figure chart and candlestick chart. We will discuss these technical charts extensively later. However, we have illustrated three types of stock market charts below. The bar chart looks a lot like the candlestick chart. All the charts displayed below are stock price charts. The nature of the input may, however, have to be altered when you move from one chart type to another.
Why Traders Need stock market Chart
Stock market Chart are like a map. History tends to repeat itself. This has proven itself time after time in financial markets. Price action fits into repeating patterns. Charts are the best way to illustrate this natural recurrence. Interpretation of stock market chart can be subjective to the individual methodology. The beauty of the charts is that with time, the correction interpretation will prove itself as transparency materializes. However, by then, it may be too late to capture a profit opportunity. The name of the game is to capitalize on transparency before it fully materializes.
Types of Stock market Chart
Technical analysts use a variety of charts based on the information they seek. However, there are three types of stock market chart that are most commonly used. They are:
A line chart is probably the most common type of chart. This chart tracks the closing prices of the stock over a specific period.
Each closing price point is represented by a dot. And all the dots are connected by lines to get the graphical representation.
While it is considered to be quite simplistic (compared to other chart types), a line chart helps traders to spot trends in the price movement. However, since it tracks closing prices, it does not offer much information regarding intraday price movements.
A bar chart is similar to a line chart. However, it is much more informative. Instead of a dot, each marking on a bar chart is in the shape of a vertical line with two horizontal lines protruding out of it, on either side. The top end of each vertical line signifies the highest price the stock traded at during a day while the bottom point signifies the lowest price at which it traded at during a day. The horizontal line to the left signifies the price at which the stock opened the trading day. The one on the right signifies the price at which it closed the trading day. As such, each mark on a bar chart tells you four things.
A bar chart is more advantageous than a line chart because in addition to prices, it also reflects price volatility. Charts that show what kind of trading happened that day are called Intraday charts. The longer a line is, the higher is the difference between opening and closing prices. This means higher volatility. You should be interested in knowing about volatility because high volatility means high risk. After all, how comfortable would you be about investing in a stock whose price changes frequently and sharply?
Candlestick charts are very popular among technical analysts. They offer a great deal of information in a very precise manner. As the name suggests, the price movements for each day are represented in the shape of a candlestick.
It is similar to a bar chart because it represents the four data points: high, low, open and close.
While bar charts give volatility information only for a single trading day, candlestick charts can offer this information for a much larger time period. In addition, the candlesticks come in different colours based on the price movements.
A falling candlestick is generally represented by a black or red body while a rising candlestick is represented by a white or clear body.
What makes candlestick charts an improvement over bar charts is that they give information about volatility throughout the period under consideration. Bar charts only display volatility that occurs within each trading day. Candles on a candlestick chart are of two shades-light and dark. On days when the opening price was greater than the closing price, they are of a lighter shade (normally white). On days when the closing price was higher than the opening price, they are of a darker shade (normally black).A single day’s trading is represented by Intraday charts. Higher the variation in colour, more volatile was the price during the period.
A Japanese invention, Renko charts, one of the major types of charts in technical analysis, focus only on price changes and use price bricks to represent a fixed price move. They filter out minor price movements which make it easier to spot trends in prices. Also, this feature makes the chart appearance more uniform.
A Renko chart technical analysis is pretty effective in identifying support and resistance levels. You get a trading signal when there is a change in the direction of trend and the bricks alternate colours.
Heikin Ashi Chart:
Heikin Ashi is another type of popular technical chart that originated in Japan is quite similar to candlestick chart. With this chart, you can visualise the uptrend and downtrend quite clearly. When there are continuous green HA handles without lower shadow, it’s a reflection of a strong trend.
On the other hand, when there are continuous red handles without upper shadow, it reflects a solid downtrend. As the HA bars are averaged, there’s no exact open and close prices for a particular period
Point and figure charts:
A point and figure chart bears no resemblance with the other three kinds of charts discussed above. It was used extensively before the introduction of computers to stock analysis. These days, however, it is used by a very limited number of people. This is chiefly because it is complex to understand and provides limited information. A point and figure chart essentially displays the volatility in a stock’s price over a chosen period of time. On the vertical axis, it displays the number of times stock prices rose or fell to a particular extent. On the horizontal axis, it marks time intervals. Markings on the chart are exclusively in the form of X’s and O’s. X’s represent the number of times the stock rose by the specified limit, while O’s represent the number of times it fell by it. The specified amount used is called box size. It is directly related to the difference between markings on the y-axis.