Reading stock charts is the backbone of technical analysis. A technical chart displays the past price behavior of a security which it exhibited while it traded on a stock exchange.
It becomes quite easy to track the price action of a security for any previous time period by a chart. It obviously depends upon the data for that security present in the system.
Understanding stock charts is the most basic thing you should know for stock trading. It is important that you read daily stock charts to succeed in swing trading or day trading.
Even if you want to buy stocks for investments, reading stock charts is must. This helps you find the appropriate entry and exit points for trading or investing in stocks.
Without stock charts, stock trading is like moving in a dark tunnel. Understanding stock charts gives you the light to find your way and see the things clearly.
There are four types of Technical Charts available which a technical analyst can use for the purpose of technical analysis.
Two types of Technical Charts are popular among the traders or technical analysts. These are OHLC and Candlestick Charts.
Reading Stock Charts : 4 Technical Charts
There are 4 types of stock charts for technical analysis. While two of them are very basic with limited information yielded, other two give you knowledge in much more depth.
Learn reading stock charts thoroughly and it will be a step towards being a successful trader.
As name suggests, this chart is in the form of line which is formed by joining the closing prices of a security for each trading session. It is a simple form of chart.
It does not show any detail regarding how the security traded in a single trading day like what was the opening price and what was the high or low for the security.
It was concerned with only the closing price because closing price was considered most important for taking trading decisions on next day.
Although closing prices are still important and we are always more comfortable in taking the trades if the security has closed above or below the resistance or support levels.
These Charts appear like mountains as you see in the Fig.
They are similar to line charts except that the area under the graph is shaded in a different colour.
They don’t serve any additional purpose for the analysis and represent the closing prices of the security.
The OHLC Charts are the more advanced version of a technical chart.
It gives more details regarding the stock trading behaviour in a particular time period.
It is represented as vertical lines of two different colours. Each vertical line represents a particular time period of trading for a security. It can be minute, hour, day, week or month and so on.
Colour of the vertical line tells whether the security appreciated or depreciated in price for the selected time period from the first opening price.
If a security closes at a higher price than the opening price at the end of the particular time period, it leads to the formation of green or bullish line. Some charts display white or blue line also for the green lines.
On the other hand, if the security closes at a lower price than the opening price for the specific time period, it leads to formation of red or bearish line. Some charting software may display as black line too.
On each vertical line, you will find two very small dot like tick marks, one on each side. The tick of right side gives the closing price while that of left side represents opening price.
The portion of line extending above the right tick and below the left tick shows the high and low the price touched while trading. So an OHLC Chart is called as Open High Low Close Chart.It is also known as a Bar Chart.
Candlestick chart is the most popular among the traders and analysts. Although similar to OHLC Charts, they exhibit more detailed trading behaviour.
It becomes quite easy to under the trading psychology of majority of the traders by candlestick chart analysis.
Instead of vertical lines as in OHLC charts, candlestick charts are made of structures what we call as Candlesticks.
Each Candlestick is made up of ‘Body’ and upper and lower shadow known as ‘Tails’.
As we discussed above, candles can be red/black or green/blue/white depending upon the opening and closing price. Upper and lower tails give highs and lows made by the security.
Candles are called as Japanese Candlestick after their origin in Japan.