Reading Stock Charts

Reading Stock Charts provide an easy-to-read graphical representation of a stock's price movement over a specific period of time.

And learning how to read stock charts is a simple task. Stock charts are sometimes called stock market graphs.

A stock chart is a sequence of prices plotted over a specific timeframe.

The time frame used for making a chart can be:

• intraday
• daily
• weekly
• monthly
• yearly

Once understood, reading stock charts is an easy task.

There are 3 popular types of stock market charts:

1. Line Chart

2. Bar Chart

3. Candlestick Charts




1. Line Chart

As seen on the stock market chart above:

1) the y-axis (vertical) represents the price scale and

2) the x-axis (horizontal) represents the time scale. Stock prices are plotted left to right across the x-axis with the most recent point being the furthest to the right.

3) in the bottom left corner, the numbers here are a references for the number, or Volume of stock shares traded.

4) the actual volume traded each individual day, if you are using a daily chart, is shown along the bottom of the graph, displayed with individual vertical bars.

The Line Chart is formed by plotting the closing price over a period of time. Connecting the dots, or price points, over a period of time creates the line.




2. Bar Chart

The white and black portion formed from the opening and closing stock prices, is called the body. The lines above and below the body are called shadows and they represent the high and low price of the day or week.

Click Here for more in-depth information on Candlestick charting.


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Price Scaling

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There are two methods for displaying the stock market price scale along the x-axis:

1. arithmetic

2. logarithmic or semi-log

1. An arithmic scale displays 10 points, or dollars, as the same vertical distance no matter what the price level.

For example, if a stock moves from $20 to $30, a 10 point move and it’s a 50% change. And then if the stock moves from $30 to $40, again a 10 point move, but a 33% increase, graphically on the stock chart, the distance will be shown as the same.

The move is shown in absolute terms, not in percentage terms.

2. A semi-log scale measures stock price movements in percentage terms. An advance from $20 to $30, and $30 to $40, although both 10 point moves, would be shown differently on the stock chart as the percentage’s are different…50% vs. 33%.

The top stock chart is a semi-log scale, AND the distance between 50 and 100 is the same as the distance between 100 and 200. However, on the lower stock chart arithmetic scale, the distance between 100 and 200 is significantly greater than the distance between 50 and 100.

Benefits of arithmetic and semi-log charts:

Arithmetic

• are useful when the price range is within a relatively tight range
• are more useful for short-term stock charts and stock trading, because price movements are shown dollar for dollar.

Semi-log

• are useful when the stock price has moved significantly, over a short or long term time
• are useful for long-term charts over a long period of time…as large movements are put into perspective
• Trendlines tend to match stock price lows better

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Conclusion

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One method or style for reading stock charts is not necessarily better than the other. When all is said and done, it is your technical analysis of the stock price action that separates successful stock technicians from the rest.

Your choice of which stock market charting method you use will depend upon personal preferences, your personality and your stock trading or stock investing style.

In the end, the keys to reading stock charts successfully are dedication, focus and consistency.


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Recommended Technical Analysis Tools and Resources

Recommended Technical Stock Trading Software

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Next:

• support and resistance
  
  
• trendlines

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