Understanding Charts

Introduction:

A stock chart is a graphical representation of the stock’s price, where the X axis is the time frame and ‘Y’ axis represent the stock price. A chart provides immense information about a stock and if you are good at interpreting it, you could predict the future price movement of the stock. It can thus improve your investing skills. Interpreting charts forms the heart of technical analysis.

Reading charts:

X axis: Represents time frame Example: minutes, hour, day, week, month, year. Depending on the X axis a chart may be referred to as a daily/weekly/monthly/yearly chart. The chart may look different for each of the time frames. A daily chart may not represent what a monthly chart does. A consistent stock will have a consistent chart across different time frames.
Y axis: Represents price movement.
Volumes and other technical indicators are generally added to the lower part of the chart for better analysis. There are a lot of websites today which help you gain access to these charts at no cost.

Chart_Example

Types of charts:

1. Line Charts:

Line Charts is the most basic and simplest representation of a stock chart. It can be used to have an overall view on the stock at a glance. It doesn’t provide minor details like opening, closing, high and low price of the stock for a time frame.

Line_Chart

2. Bar Charts (OHLC chart):

A bar adds further details to a line chart and represents four price points of a stock for a time frame i.e

OHLC

Open(O): The price the stock opened at
High(H): The day’s highest price it touched
Low(L): The day’s lowest price it touched
Close(C): The closing price of the stock

OHLC_Chart

3. Candlestick Chart:

Like a bar chart, a candlestick chart also portrays four price points i.e Open-High-Low-Close and looks like a candle when it is formed by these 4 values.

Candles

The wicks show the HIGH and LOW while the body shows the OPEN and CLOSE. Generally a Green candle is used to show a high closing and a RED candle is used to show a low closing, compared to the opening price. This is the most commonly used chart now days.

Candle_Chart

Understanding Basic concepts in a chart:

1. Trend Line: A trend line is a line formed by connecting two or more points on the chart.

2. Uptrend Line: An uptrend line is drawn by connecting two or more low points of a stock on its chart. The second low is always higher than the first low. On a graph, connecting these two low points will result in a positive slope for the line.

3. Support: Support is the price level at which heavy demand flows in and the stock moves up preventing a further decline. Uptrend line forms the support of a stock. As long as the stock price remains above the support levels, the uptrend is intact. If the stock falls below the support, it could mean a supply in the stock and a momentary trend reversal.

Support

4. Downtrend line: It is drawn by connecting two or more high points of a stock on its chart. The second high is always lower than the first high. On a graph, connecting these two high points will result in a negative slope for the line.

5. Resistance: Resistance is the price level at which heavy supply flows in and the stock moves down preventing a further rise. Downtrend line forms the resistance of a stock. As long as the stock price remains below the resistance levels, the downtrend is intact. If the stock rises above the resistance, it could mean a demand in the stock and a momentary trend reversal.

Resistance

6. Channel: A channel is the area between 1) a trend line that connects the highs and 2) a trend line that connect the lows. A channel can be upwards, sideways or downwards. In a channel, the line connecting the highs forms the resistance while the line connecting the lows forms the support. Channel is mostly used to analyze the consolidation period where a stock trades between its support and resistance levels.

Channel