Charting Basics
Charts are an invaluable tool for stock and CFD traders. Indeed, any time that you as a trader spend studying price charts will be worthwhile. Charts can be an immense and influential aid to intelligent trading. Becoming familiar with how they function, and with what they show, will enable you to fully harness the advantages that they offer.
To help you become familiar with a range of charts and their effective use, we have provided information the following topics:
These materials will also explain how state-of-the-art technical indicators can be added to your charts to improve your trading results. As you work through this information, you should fully understand each step before progressing to more advanced material.
We shall begin by explaining how a simple stock price chart is created.
Stock price charts (see Figure 1) are two-dimensional and therefore revolve around only two axes. The X axis is horizontal whilst the Y axis is vertical.
Figure 1-Basic Chart Setup
The X axis runs horizontally along the bottom of the chart and shows the timeline. The most distant data appears on the left of the chart while the most recent data appears on the right.
The Y axis runs vertically up the right side of the chart-providing a price scale for the chart. Lower prices appear at the bottom of the chart while higher prices appear at the top.
Taken together, the two axes allow you to determine the price at which a stock was trading at any time falling within the parameters of the chart. It is easy to see, for example, that the S&P 500 was trading at 13,675 on 14 March 2007 (see Figure 2).
Figure 2-Identifying the Date and Price
Charts allow you to track the price movements of stocks or CFDs in which you have an interest on a minute-by-minute or month-by-month basis. The charts are flexible so you can select whichever time-frame is best for you.
As a general rule, traders who are more interested in short-term trends and investments will tend to use shorter time-frames for their charts. Conversely, traders who are more interested in long-term trends and investments will tend to use extended time-frames for their charts. For example, traders who hope to capitalize on temporary price surges will typically use one-minute or five-minute charts, while traders who are more interested in long-term investments will typically use daily or weekly charts.
Some traders use multiple time-frames so that they can chart stock or CFD movements from different perspectives. This technique is explained later.
Changing the time-frame on your chart to suit your needs is easy. Click on the button at the top of the chart. A drop-down menu will appear. Then you select your preferences (see Figure 3).
Figure 3-Chart Time Frames
IC Markets charts let you analyse the price movement of any stocks or CFDs in several formats. These include line, bar and candlestick charts, so they are very flexible. Traders are individuals and the system has been developed to accommodate their individual preferences.
Technical analysts typically use one of the following three chart types:
Line charts are the most basic chart type because they are uncluttered. With line charts, it is easy to identify support and resistance levels.
Line charts plot the closing prices for each trading period and then connect them with a single line (see Figure 4).
Figure 4-Line Chart
Bar charts contain more information than line charts. Whereas line charts only show closing prices, bar charts show the opening and closing prices, as well as the high and low prices, for each period.
It is important to realise that these bar charts are a little more complex than the elementary bar charts we all used at school. Each bar is, in effect, shaped like a tree (see Figure 5).
You create the chart by plotting a series of these bars across it. Each bar represents one trading period. To create each bar, you plot the high and low prices of a trading period and connect them with a vertical line. Imagine this as a trunk on which the highest price will always be at the top and the lowest price at the bottom.
Then you plot the opening price to the left of the vertical line you have just drawn, and connect that point to the vertical line (i.e. the trunk) with a horizontal line. So you now have a branch on the left.
Finally you plot the closing price to the right side of the vertical line (the trunk), and connect that point to the vertical line with a horizontal line. So you now have a branch on the right.
Looking at the bar, you can instantly see if the stock concerned gained or lost value between opening and closing. If the 'branch' on the right is higher than its counterpart on the left, then the value climbed between the open and close. If the 'branch' on the right is lower than its counterpart on the left, then the value fell between the open and close.
Meanwhile, of course, the height of the 'trunk' tells you whether the value of the stock or CFD fluctuated a great deal during the trading for this period. A short 'trunk' (or, indeed, if it has no height at all) means that the price remained very stable.
This information can be harnessed as a predictive tool. If the stock or CFD closed on a high, for example, then the 'branch' on the right would be at the top of the 'trunk'. If you are interested in short-term gains, you might be tempted to assume that the stock would continue to rise as soon as trading recommences. This would, of course, be a gamble. Equally it would be a gamble to assume that a stock or CFD which closed on a low would continue to fall when the market re-opened. The bar chart's function is to provide you with information to make an intelligent decision.
Figure 5-Price Bar
The bar chart enables you to identify performance trends. If the price of a stock or CFD rose during the period, then investors were bullish (i.e. confident and likely to buy). If the price lost during the period, then investors were bearish (i.e. not confident and likely to sell).
See an example of a complete bar chart below (see Figure 6).
Figure 6-Bar Chart
Candlestick charts are a Japanese invention dating back to the 18th century that were originally used to track deals on the rice market. They show the same information as bar charts, but their format is a little different. It appears to be easier for most traders to spot patterns using candlestick charts.
Essentially, the process is not so different from what you would use to create a bar chart.
To create a candlestick chart, you must plot a series of candlesticks. Each candlestick represents one trading period. To create an individual candlestick, you plot the high and low price of a trading period and connect them with a vertical line. This line is called the wick of the candlestick. Essentially this is the same as you would have done for a bar chart.
Next, you plot the opening price by drawing a horizontal line through the vertical line, or wick. This is similar to what you'd do when creating a bar chart. But this time you cross all the way through the vertical line (see Figure 7).
Then you plot the closing price by drawing another horizontal line through the vertical line. Again, this is very much like a bar chart but you cross all the way through the vertical line.
These two horizontal lines effectively mark the top and bottom of the body of the candlestick.
Finally, you can fill in the area between the opening price and the closing price (and, in effect, rub out the wick which would disappear within the candlestick). This area is the body of the candlestick.
Figure 7-Price Candlestick
Like the bar chart, the candlestick chart enables you to identify trends. If the price of a stock or CFD rose during the period, then investors were bullish. If the price lost during the period, then investors were bearish. Really the choice between bar charts and candlestick charts is a personal one. Both continue to be popular and self-evidently provide identical information. However, some feel that candlestick charts make it a little easier to determine, at a glance, whether there has been a substantial overall price shift between the open and close and whether the entire period's trading has been within narrow or broad confines.
You can see an example of a candlestick chart below (see Figure 8).
Figure 8-Candlestick Chart
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