Stock Charts – Investors Guide to Stock Charts

“There is more than one way to skin a cat” goes the old saying, quite why someone would want to skin a cat is beyond me.  Like the skinning of cats, there is more than one way to picture the supply and demand situation of the stock market.

Types of Stock Chart

Stock charts come in many shapes and sizes.  From the differences in the bars, to the different concepts applied to the chart itself.  Here you will find a reference guide to the many types of chart available with an overview of their potential uses.

Line Stock Chart

This is one of the most basic charts, probably giving the least amount of information.  The line in the top pane is drawn using the close price for each unit of time.  So if this is a daily line chart, the close price for the day is used.  If this is a 5 minute chart, then the close price for each 5 minutes of trading is used.

The Good

A very simple view of the price movement.  Good to use when comparing many stocks on the same chart.

The Bad

Does not show the Price Open / High / Low for the trading period.  The trading range for the day is important in price based decision making

 

High Low Close Bar Chart (HLC)

Using bars is a step up from the line chart as is allows us to plot additional useful data on the chart.  Here we have each bar representing a trading period with the price High, Low and Close represented.  Refer to the diagram.

The Good

More information is available, showing the range of the days trading.

The Bad

No opening price is reflected in this chart.  The opening price is important as it allows us to immediately see if the price gapped up or down on open, and also where the closing price is in relation to the opening price.

 

Open High Low Close Bar Chart (OHLC)

The complete bar chart.  The chart of choice for those who like to use bar charts.  Here we see the range of the day’s trading including  the open price and the close price.

The Good

We can see instantly if the trading period closed higher or lower than the open.  We can also see the length of the bar, which shows us the volatility or the strength of the trend.

The Bad

There are few down sides to this chart type and it is used by many investors and traders.  Most chart packages also allow you to color the up days green and the down days red.  For those who prefer even more information in the price chart the following charts can also be used.

 

Japanese Candlestick Charts

Used widely in Japan and gaining a strong foothold in the rest of the world the Japanese Candlestick chart gives an excellent insight into current and future price movement. Named Candlesticks because they look like candlesticks with a wick and a main body.

The Good

Gives an excellent view of the Open, High, Low and close of price.  Pictorially illuminating and easy to see trends.  There is a full reference of 1 bar to 4 bar patterns which help us to make judgments on the future direction of price.  They connect the psychology with the price pattern.

The Bad

Although Candlesticks have many advantages, they can seem like information overload to the beginner.  There are also many Candlestick patterns to learn.

Further Reading.

 

Stock Charts Using Volume

The use of volume in technical analysis is important as volume allows us an insight into the supply and demand situation.  The following charts incorporate volume into the price window to provide additional information.

 

Price at Volume Chart

The price at volume chart is an exciting new development, as instead of showing volume for a certain time period, it shows us the volume of trades at a specific price level.  This enables us to see at what price level most of the market participants believe the stock is fairly priced.

The Good

Innovative and intuitive, this method of charting combined with standard volume bars can enable you to see market psychology both in time and price.  It is also easy to see volume increasing as price rises, this is a very bullish sign.

The Bad

Not all stock charting packages offer this type of indicator

 

EquiVolume Stock Charts

EquiVolume attempts to provide the solution of Volume at Price in a different way.  Instead of plotting volume in separate bars it is in fact incorporated into the price bars themselves.  The wider the price bar, the more shares where traded during that period.

The Good

Visually impressive and extremely easy to interpret.

The Bad

This type of chart can distort the time line running across the bottom of the chart.  This makes drawing accurate trend lines more challenging.  Few Stock Charting service providers offer EquiVolume.  I would not recommend using EquVolume as a tool.

 

Other Exotic Charts

There are a few other types of charts that you probably have never heard of before.  They are however quite useful and you would be required to learn them if you wanted to become a certified Technical Analyst.

 

Point and Figure Charting P&F Charts

Point & Figure Charts are very unusual as they feature no time line along the bottom horizontal axis.  The Chart is made up only of price swings.  The vertical price bar is arithmetic and shows only units of price.  A “O” is plotted if the price moves down a whole price unit (for example 50 cents).  Then when the price changes direction and starts to move upwards an “X” is marked in each box.  This filters out smaller price moves and enables us to focus on trend quality.  Trend lines are always plotted either horizontally or at 45 degree angles.

The Good

An excellent tool for doing price target calculations.  Simple to learn and interpret, few price patterns to learn.

The Bad

Learning this type of charting can be easiest when performing the charting by hand.  That means you marking the “X” and “O” on a piece of paper.  This can also be very time consuming.  Few services offer Point and Figure Charts, however,  StockCharts.com offer a free Point and Figure Charting Service that is well worth investigating.

 

Market Profile Charts

Developed in the 1980’s by Chicago Board Of Trade Pitt Trader J. Peter Stiedlmayer.  The letters on the chart show time units.   “A” represents the first 30 minutes of trading, “B” represents the second 30 minutes of trading.  The point of control is the area (price range) at which the most trades occur during the day.  The value areas is the price range at which 70% of the action happens.  When price is above and below the value areas this represents a possible ideal buying or selling point.

The Good

People who use market profile chart become evangelists to the cause.  They believe it offers unique insights into buy and sell opportunities.  Can be a good option is to are a quick fire day trader.

The Bad

Can require quite an effort in order to learn how to use them, and very few stock chart services offer this type of charting.

 

Stock Charts Summary

Some people refer to investing in the stock market as gambling.  I do not see it this way.  With the vast array of technical and fundamental data available you have a wealth of information at your finger tips.  Knowing how to use it is key.  As you can see there are many types of charts, the ones I would recommend are OHLC Bar, Candlestick Charts and Price at Volume Charts.  However, the choice is yours.

2 COMMENTS

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