Understanding Stock Market Charts
By Scott McCormick
April 25, 2019
In the world of investing and trading there are a multitude of data sources to help investors and traders make buying and selling decisions. Many times, the volume of information can be overwhelming and, at times, the reliability of the information has been called into question. To filter out the noise of the financial media outlets, market participants will turn to fundamental and technical data to help them make their buy or sell decisions. While both technical and fundamental analysis has their advantages, we will focus on Trading Charts, also known as Technical Analysis.
Regardless of whether you are interested in using charts for Stock investing, Futures, Options or Forex Trading, they have proven to be a reliable and timely source of information to help the investor or trader determine where to precisely enter their trade and where to exit for a predefined risk or profit amount. To help you understand the usefulness of trading charts, we will take a closer look at the components of a chart, the most common type of charting on most platforms, how to interpret the data, and the relevance of the data to various types of long or short-term investors or traders.
The purpose of a chart is to display the price of recorded transactions over a specific period of time, which can be customized by the investor or trader. All charts are built with a horizontal and a vertical axis. The horizontal axis of the chart displays the time span as determined by the investor or trader, and the vertical axis displays the price range that prices have traded at within the visible time span. A closer look at the horizontal, or time, axis reveals the time, or when a trade took place. The vertical, or price, axis will display the prices where the trades took place. Depending on the interval used, the scale measuring time and price can vary.
Use of Time Intervals on Stock Market Charts
Longer time frame charts, such as a Monthly or Weekly interval, can measure years and quarters worth of historical prices that could have a price scale of hundreds of dollars for Stock Market Charts benefiting the long-term investor. A Daily, 60 minute, 5 minute or 1 minute interval on a Stock Market Chart can be used by a more active trader to determine trends and trading opportunities that could last as little as days and hours with a price scale measuring dollars to dimes for the shorter term day trader. A more in-depth look at common charting periods can be found here.
Deciphering Basic Stock Chart Data
Trading Charts often offer additional information for the investor or trader beyond just price data. The top of the chart above displays helpful information about the company or fund being traded to assist the investor or trader in monitoring daily price and trading activity. From left to right, here is a breakdown of what you can learn just from the data at the top of a stock chart.
The first three pieces of information across the top of the chart refer to the company and chart itself. First you will likely see the Company or Fund being traded.This simply indicates the particular company or fund (in this case an Exchange Traded Fund) whose price data is being shown. Next is the Ticker Symbol, which is the call sign assigned to that stock or fund for trading in the stock market. As mentioned above, charts can be viewed in different timeframes or Intervals. The interval for this chart is 5 minutes.
The remaining data at the top of the chart gives a quick reference for gauging stock price and volatility. When monitoring any market, a chart will often display the current price a buyer or seller is willing to transact at, otherwise known as the Bid and Ask which is displayed as a B and A on the chart. In this case, the Bid is 218.12 which is the highest price someone is willing to buy at, and the Ask of 281.13 is the lowest price someone is willing to sell at. These values are updated moment by moment throughout the day as new buy and sell orders enter the markets, and old orders are filled or canceled. Next you will see Net CHG, which Indicates the difference in price between the Last trade and the price at close the previous trading day. When a trade takes place on the Bid or the Ask it is recorded as the Last trade (L). It is displayed on the vertical price axis (highlighted in green) in addition to the top of the chart.
As trades take place investors and traders like to determine how much a stock may be up or down for the day, also called the Net Change (Net CHG). Since the Last trade was 281.13, the Net CHG value of 2.09 indicates the distance the stock traded compared to the 4:00 New York Stock Exchange closing price of the previous trading session as noted by the PC (Previous Close) notation on the chart. Moving back one step, because stocks vary in price it is important to consider the Net % Change in value to have an apples to apples comparison of price movement. It would be inappropriate to say that a $1 move in a $50 stock is the same as a $1.00 move in a $200 stock. The former represents a 2% movement in price whereas the latter represents only a .5% movement in price. In this case, the SPY was .75% higher than where it closed the previous trading day.
Continuing across the top of the chart you will see an O. When the New York Stock Exchange opens for trading the opening price for stocks are also recorded. The value for the Open is represented as O. On this day the opening price of the SPY was 280.99. Following the opening price, the High and the Low of the day are also displayed as the values Hi and Lo. When the New York Stock Exchange opens for trading the High and Low for the day are recorded and are updated whenever the stock makes a New High or New Low for the day relative to the highs and lows reached earlier in the session. This offers a sense of the direction the stock or ETF is trading, which can be valuable information to a day-trader.
Lastly, V stands for Volume. This is the cumulative number of shares that are traded throughout the session. This offers a sense as to how actively a stock is being traded relative to the most recent trading days. Volume is relative to the value of the security itself but can also be compared to other securities to determine whether one stock or ETF is traded more heavily than another.
Types of Charts
Stock Market Charts have been used for over 100 years and, until the computer era made charting simpler and faster, charts had to be kept by hand or the investor would have to subscribe to a charting service. Most stock charts kept track of the Daily, Weekly or Monthly closing values on a Line Chart as seen below.
However, a more involved investor or trader would track not only the Closing price, but also the Opening, High and Low price for the Day or Week to study more closely the day to day and week to week market behavior, information which can be lost when simply using a line chart. The types of trading charts used for this purpose became known as Bar Charts due to the appearance of vertical lines, bars, with tick marks on either side as seen in the chart below.
As shown below in the bar chart illustration, the vertical aspect of the bars on the bar chart display the range for the period of time being plotted, in this case a Daily value. The range is defined as the difference between the High and Low. On the left hand side of the bar a horizontal mark is made indicating the open, and on the right hand side of the bar a second horizontal line is made marking the close for the period being plotted. In this example, the bar on the left closed higher than the open for the day, indicating that prices when up or that it was a bullish day. The bar on the right closed lower than the open, indicating that prices fell or that it was a bearish day.
Japanese Candlestick Charts
An alternative to the Bar Charting method is called Japanese Candlestick Charting. Although it has been used for centuries in Japan, it has only gained popularity in the West since the 1980s. Thirty plus years later, Japanese Candlestick Charting is now one of the most popular forms of Stock Charting. As seen below, the candle stick plots the same open, high, low and close values as the bar chart for each period. For example. a Monthly candle would disply where the open, high, low and close price was for the month. However, Japanese Candlesticks color in the difference between the open and the close, making it easier for the investor or trader to see what happened during that period of time. The portion of the candlestick that is colored in is referred to as the Real Body, or simply The Body. The formatting of the body will vary from one platform to another and most can be customized by the user. Beyond the body, a candlestick will display upper and lower segments in the form a thin vertical line. These are typically referred to as Wicks, Shadows or Tails and can carry with them terms like topping/bottoming or upper/lower to refer to a particular placement on the candle body; which also signifies a particualr type of trading action for that given period of time. The purpose of the Wick is to show how low or how high prices reached during that specific period of time. In the world of Candlestick Analysis, one will find that there are roughly thirty-six candlestick patterns that traders will use to determine what should happen next.
It is important to remember what a candlestick chart, or any form of stock market chart, is really communicating. Which is what price has done during a specific period of time; prices moving up, down, or sideways. Proper stock chart analysis can also provide a picture of bullish or bearish sentiment for the market over the period of time analyzed; whether that is a span of 10 years on a monthly chart, five years on a weekly chart, six months on a daily chart, two weeks on a 60 minute chart, or the last two days on a 5 minute chart. It is imparitive for the stock chart trader to learn how to properly interperet the aggregate historical data that the market is presenting through the charts and formulate an opinion about what is most likely to happen next in a particular stock or some other financial instrument. Based on this data, a trained and experienced investor or trader should be able to confidently identify where they would enter with with low risk, high reward, and a high probability of a favorable outcome for a long term investment or short term trade. It is also important to understand that one investment or trade, loss or win, does not define an investor or trader’s capability; it is the cummulative outcome that could span decades.