Stock Trading Technical Analysis: Stock Chart Types
Information on the stock market can be analyzed and displayed on charts. These charts, can, over time, be used to look at trends in the market and as such forecast the possible behavior of stocks. The information displayed on these charts can be as a result of the combination of price, volume as well as time intervals. Below, we discuss the most common types of charts used in day trading.
- Line Charts
These are graphs that include a single line from left to right over the graphing space. The line links the specific closing price for a stock at each specified time interval. The chart is basic in structure. It gives an overview of how the price of the stock has changed over time. It is mostly used in presentations as well as reports. This is because the charts can quickly present the history of a stock and from this, predictions on how the stock is likely to behave over time in the market can be made.
One of the methods used to notice trends in these type of charts is to connect the peaks and valleys of the stock’s price. These can then be used to notify traders on when they should expect price inflections or break points in the market. These types of charts are very straightforward. However, their simplicity may cause them to be insufficient information sources for active day traders.
- Candlestick Charts
Historically, these charts were used by Japanese rice merchants so as to track the possible prices for rice with time in the 18th century. In 1991, a book by Steve Nissan titled “Japanese Candlestick Charting Techniques” brought the knowledge of this charting method to the West. With time, candlestick charts have become the most popular way of analyzing stock market information amongst traders. Elements used in the graph include the stock’s opening price, its high, its low and its closing price data over a specified period. This data is used to generate a candlestick, which is then placed in a particular position within the graphing space.
The candlestick is composed of three main parts. These include:
- The body – this part of the candlestick consists of the stock’s opening and closing prices. It could either be red or green depending on price action. If the stock’s closing price is higher than its opening price, then the candlestick’s body will be green. The body will be colored red if the opening price of the stock is higher than its closing price.
- The upper tail – this is a thin line extending from the top of the candlestick’s body to the stock’s highest price over a particular time interval
- The lower tail – this is a thin line extending from the lower part of the candlestick’s body. The line reaches the mark for the stock’s lowest price over the specified period.
It should be noted that tails could also be referred to as wicks in some circles. When a candlestick’s body is red, it means the market is bearish. Alternately, a green body for a candlestick shows that the company’s stock was bullish over the specified period.
Candlestick patterns are usually used by traders to generate trade signals, which show possible times one could open and close a position within a trade.
Other charts used by stock traders include bar charts and point and figure charts.