Education 41: Introduction to Charts
Different Types of Charts
There are several different types of charts, and each offer their own benefits.
Line Graph: This is a simple dot for the day's closing price. It show's direction of the price relative to the previous days.
Candlestick (Bar) Graph: This is one of the most common types of charts used for stocks as it shows the Open, High, Low and Closing Price for a stock for the day. In a Candlestick Chart, the color of the bar or candle represents whether the stock closed up or down for the day. Green represents that the stock closed up from it's open and Red represents that the stock closed down from the opening. In addition to supplying more information about the day's price movements, the type and length of the bars also represent patterns or technical information for some traders.
To keep things simple, I am going to focus most of my further discussions on Candlestick Charts, as this is the most common type and easiest to understand (other than a line graph).
Candlestick Chart Example
In the top half of this chart, the candlesticks represent the daily price moves for the S&P 500. The Green numbers running up the right-hand side represent the value.
The last candlestick is GREEN. This means that the closing price for the day was higher than the closing price for the previous day. The top of the candlestick represents the HIGHEST price that the S&P traded that day. The bottom of the candlestick represents the lowest price that the S&P traded that day.
RED Candlesticks represent days where the closing price was lower than the previous day's closing price. You can see that the day preceding the last candlestick (April 2 - the dates are running across the bottom of the chart) was a down day (RED Candlestick).
The bottom half of the chart shows the volume for that day. Volume will become an important indicator going forward as we look for momentum, and when volume increases, the direction fo the stock price gains momentum in that direction.
The GREEN bars represent the total volume of shares traded that day and the day's price ended higher than the previous day's closing price.
The RED bars represent the total volume of shares traded that day and the day's price ended lower than the previous day's closing price.
Moving Averages are a technical indicator that are used to help determine trends by smoothing out the variations of the daily stock prices.
They way these work, is that the closing prices for a set period (ie. a 50 Day Moving Average uses the last 50 days of closing prices) are added together and then divided by the number of periods. This gives an average price.
It is called a moving average because at the end of each trading day, the newest price is added and the oldest price is removed. Simply put, if this results in a higher average price, then the trend is said to be going up. And conversely, if this results in a lower price, the trend is said to be moving down.
In addition, these moving averages act as a confirming indicator for a trend. In the chart above, the price is definitely in a downward progression (Closing prices have been dropping since March 23, 2015). When the day's price closes below a moving average (as it did on March 25, 2015 when the day's price closed below both the 20 Day Moving Average - YELLOW Line and the 50 Day Moving Average - BLUE Line), technnicians view this as confirmation of a trend (Crossing below the moving average signals a down trend).