Stock charts explained

stock charts explained Stock trading system

All profitable traders use them. Stock charts are like a map showing you were a stock has been and where it “might” be going.

If you are not the master trader (yet) you want to be, then you belong to one of three universal classifications. Which one are you.

Trader 1: You have a basic understanding of stock charts, you know that charts paint of picture of supply and demand, support and resistance, increasing or decreasing interest in owning a particular stock

Trader 2: No clue what-so-ever, but am interested in knowing more

Trader 3: Don’t know, don’t care.

If you are trader #3, then this article isn’t for you (surprise).

On the other hand, if you are interested, even a little, and no matter what you already know, then keep reading. Because this article is meant just for you.

You’ll get the description of four types of stock charts.

#1 Bar charts

The basic bar chart shows a stock’s price over time by plotting on a vertical line the high, the low, the close, and sometimes the open, for a given time frame.

For example, a daily chart for the Nasdaq 100 Tracking Unit showing the Open, High, Low, and Close (also called an OHLC chart) looks like this:

#2 Candlestick charts

Candlestick charts always have the open, high, low, and close. The difference between the open and close forms the “body” of the candlestick. The high and low adds the “wick”.

Of course, not every candlestick has a wick sticking out – a stock with the open and close at the extreme end of the trading range show no wicks. Likewise, there is not always a body – when the open and close are the same, the candlestick is called a “doji”.

A candlestick with the body filled in (or, in the following chart, when the body is black) shows the close being less than the open. The exact opposite is true when the close is greater than the open – the body is hollow (or white).

Candlesticks have some interesting names – engulfment, doji, shooting star, hammer, piercing lines, three black crows, hamari. The list goes on.

The following chart is the same as the one presented above for the QQQ, this time in candlestick format. The highlighted bar is a down bar – the close is less than the open.

For those comfortable with candlestick charts, one recommended book for improving your use of candlesticks is Steve Nison’s Beyond Candlesticks. Steve does a great job of including profit potential versus perceived risk relative to the use of candlestick trading – recommended reading.

#3 Line charts

Line charts do a great job of removing all the “noise” associated with stock charts. The most typical line chart plots the closing price of the stock of interest.

This gives the trader a clearer picture of the underlying trend of a stock – much line moving averages do.

Here’s the QQQ with the closing price plotted as a line chart.

#4 Point and Figure charts

I show this charting method for sake of completeness.

Two things that PnF charts do well: (1) show supply and demand – without regard to time, and (2) filter out price reversals that are below the user defined minimum. As such, how you set up the “box” sizes and reversal amounts is critical. Tom Dorsey’s Point and Figure Charting does a great job explaining Point and Figure Charting.

Use stock charts any time.

All charts can be used over any time frame. Charts become more powerful as a predictive tool as you analyze a stock over different time frames.

A impressive rally on an intraday chart, might look like a serious rally on the daily charts, might appear as a correction to a downtrend on the weekly charts, and might not even appear on the monthly charts.

Use stock charts to keep you focused on where a stock has been and where it “might” go next.

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