You’re looking at a stock chart for the first time – where do you start?! What do all those lines mean?
Price data is often plotted on the vertical or Y-Axis while time data (minutes, days, weeks, months) is often plotted on the horizontal or X-Axis. The goal of reading a chart is to determine where price has traveled over a given period of time and determine potentially where it might be going through studying past and present price data.
There are a few popular methods of representing price action on a chart, including the following:
1. Line Charts often reflect the period’s close only, operating under the notion that the close is the most important piece of information, as it reflects the sentiment of all market participants willing to hold positions overnight. A line chart “connects the dots” of each period’s close and is well-suited for trendline or price trend analysis. Line charts eliminate the period’s open, high, and low and allow you to focus on how price is moving from close to close.
2. Bar Charts reflect the open, high, low, and close of the period and are drawn as vertical lines with small hash marks to reflect the open and close. Sometimes a bar chart will only show the high, low, and close. Traders find bar charts represent the data simply, yet provides more information than Line Charts. Bar charts can compress the data, which allows you to see more bars at a time and thus ascertain the trend or applicable price patterns more clearly.
3. Candle Charts emphasize the price difference between the open and the close, while also showing the period’s high and low similar to Bar Charts. Some traders believe Candle Charts have advantages over Bar Charts because the period’s action is easier to visualize, and many believe “candlestick patterns” hold a major key to seeing the balance between buyers and sellers play out over time.
There are other types of charts, including Kagi Charts, Gann Swing Charts, Point and Figure Charts, and Renko Charts – it is generally advised to begin with Line, Bar, and Candle Charts before moving on to these other forms of charting, although some traders utilize Point and Figure charts exclusively.
Indicators on Charts
Most traders want to see more information on a chart than just the period’s open, high, low, and close. They want to use indicators to help them see insights into price behavior that may be developing.
It is quite common to see Volume Bars on charts, which reflect trading activity over a given period. Generally, volume is displayed at the bottom of a price chart.
Moving Averages are usually overlaid with price data and are also scaled on the Y-Axis. These can be helpful in determining a price trend or to find possible support or resistance levels.
Oscillators and other indicators are often displayed either above or below the price data, depending on the trader’s preference. These can include simple or complex indicators which can reflect volatility, price swings, momentum, rate of change, or other derivations of price or volume.
Sometimes a chart may show more complex, hand-drawn annotations such as Elliott Wave Counts, Fibonacci Retracements, Cycle notations, or Gann angles. Generally, these are placed on a chart by the trader, and not automatically by a computer program.
I advise you to play around with the chart settings that you understand and feel adds value, but once you settle on a workable set of parameters, you need to “train your eye” to recognize these settings and not adjust them too frequently.