Stock Charts
What are Stock Charts?
Stock Charts
Introduction
A price chart is a sequence of prices plotted over a specific timeframe. In statistical terms, charts are referred to as time series plots.
On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis, with the most recent plot being the furthest right.
Technicians, technical analysts and chartists use charts to analyze a wide array of securities and forecast future price movements. The word “security” refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices. Any security with price data over a period of time can be used to form a chart for analysis.
While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security’s price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to observe a security’s performance over a period of time, whether it’s trading near its highs, lows or inbetween, as well as the effect of key events on its price.
Charts Timeframe
Timeframe
The timeframe used for forming a chart depends on the compression of the data: intraday, daily, weekly, monthly, quarterly or annual data. The less compressed the data is, the more detail is displayed.
Daily data is made up of intraday data that has been compressed to show each day as a single data point, or period. Weekly data is made up of daily data that has been compressed to show each week as a single data point. The difference in detail can be seen with the daily and weekly chart comparison above. 100 data points (or periods) on the daily chart is equal to the last 5 months of the weekly chart, which is shown by the data marked in the rectangle.
The more the data is compressed, the longer the timeframe possible for displaying the data. If the chart can display 100 data points, a weekly chart will hold 100 weeks (almost 2 years). A daily chart that displays 100 days would represent about 5 months.
There are about 20 trading days in a month and about 252 trading days in a year. The choice of data compression and timeframe depends on the data available and your trading or investing style.
Traders usually concentrate on charts made up of daily and intraday data to forecast short-term price movements. The shorter the timeframe and the less compressed the data is, the more detail that is available. While long on detail, short-term charts can be volatile and contain a lot of noise. Large sudden price movements, wide high-low ranges and price gaps can affect volatility, which can distort the overall picture.
Investors usually focus on weekly and monthly charts to spot long-term trends and forecast long-term price movements. Because long-term charts (typically 1-4 years) cover a longer timeframe with compressed data, price movements do not appear as extreme and there is often less noise.
- Others might use a combination of long-term and short-term charts. Long-term charts are good for analyzing the large picture to get a broad perspective of the historical price action. Once the general picture is analyzed, a short-term chart, such as a daily chart can be used to zoom in on a narrower range of time (e.g. the last few months).
The keys to successful chart analysis are dedication, focus, and consistency:
- Dedication: Learn the basics of chart analysis, apply your knowledge on a regular basis, and continue your development.
- Focus: Limit the number of charts, indicators and methods you use. Learn how to use them and how to use them well.
- Consistency: Maintain your charts on a regular basis and study them often (daily if possible).