Lesson 4 – How to Read Stock Charts

Topic Progress:

In our last lesson we wrapped up our discussion on Dow Theory. In this lesson we are going to talk about the basics of charts. The tool of the technician when analyzing the forex, futures, or stock markets is the price chart. Very simply a price chart is a chart showing the movement of the price of a financial instrument over a chosen time. As you can see on the chart below of GOOGLE the bottom or x axis shows the time period which was chosen to display (in this case daily), and the vertical or y axis shows the price of the instrument (in this case the stock price of GOOGLE)

Chart of GOOGLE

Most charts will allow a wide variety of time frames to be displayed and the time frame that technicians choose to use varies widely and depends on each traders trading style. In general, longer term traders will focus on daily time frames and above, and shorter term traders will focus on intraday charts such as hourly or 15 minute charts. Many traders will also use a combination of time frames in order to get a full picture of what price has been doing by, for instance, looking first at a longer term daily chart, then moving to an hourly chart, and then finally to a 15 minute chart. 

Types of Charts

Although there are many different types of charts which stock, traders of the stock, futures and forex markets use, the most common, which we will review below, are the line chart, the bar chart, and the candle stick chart. 

Line Charts 

A line chart is the most basic type of chart as it displays the least amount of data. Very simply, line charts display only the closing price of an instrument and are used by traders who do not care about viewing the open, high, and low prices or when only the close price is available. 

Example of a Line Chart: 

Bar Charts 

In addition to the close price, bar charts also show the open, high, and low prices for the time period selected. The name of the chart comes from the fact that the high and low of the instrument for the time period selected is displayed as a two points connected by a vertical line or bar. The open and close are then displayed as short horizontal lines placed across the vertical lines. 

As you can see from the chart below bar charts display a much more detailed picture of the price movement of a particular security than do line charts.

Example of a Bar Chart 

Candlestick Charts 

Candlestick charts (which are also sometimes referred to as Japanese candlesticks because they originated in Japan) display the most detail for the price movement of a security of the three chart types listed here. A candlestick chart is similar to a bar chart with one significant difference – in addition to displaying the open, high, low and close prices, candlestick charts use different colors to represent when the open is higher than the close and vice versa. 

In general when the open price for the time period selected is lower than the close, white or unshaded candle form and when the open is higher than the close a black or shaded candle forms. I say in general here in reference to the colors of the candles as sometimes instead of shaded and un shaded different colors such as red for down days and green for up days are used. 

On a candlestick chart the thick or colored part of the data points is referred to as the body of the candle and the thin lines at the top and bottom (which represent the space between the open/close and the high/low for the time period selected are referred to as the wick. 

Example of a Candlestick Chart and Candles:

Source: tradetrek.com 

You should now have a good understanding of price charts and the main types of charts available to you as a trader. In future lessons we will go into more detail of how to utilize a chart to analyze and place trades. In our next lesson we are going to go over the basics of support and resistance and how we can use these levels to spot potential trading opportunities.