Elemets of a stock chart
If you are used to see stock charts from the movies you may be confused looking at the charts used in this blog:
In this article I will explain the bare minimum to understand what you are seeing, in later articles I will explain in detail every element of the chart.
This is how a line chart looks like:
It is done connecting with a line the price point of every single time frame. For example if the time frame is a day you can have a point at the price of the stock for that day and then connect every point:
This is good but not the best: every time frame, let's say every day, the prices move up and down, how can you make a decision about which price use as point for the day?
You can use the closure price or the average or the weighted average or the open or the maximum or the minimum or who knows!
In every time frame however there are four price points that are statistically relevant: the opening price for that time frame, the minimum, the maximum and the closure price.
We should draw all this four points in our chart and then figure out a way of connecting them together with a line, or four lines or... enter the candlestick chart!
The charts that you see on this site are all candlestick charts: for every time frame you have a so called candle. It is a rectangle in green or red with a line on the top and a line on the bottom.
I think now you are already guessing how it works! The top and bottom of the rectangle are the opening and closing price of the time frame; which is which is shown by the color of the candle.
If the color is green the time frame has been a positive movement of price so the open price is at the bottom and the close price is at the top. If the color is red the opposite: the time frame has been a negative movement so the opening price must be the top and the closing the bottom.
The bar on top and bottom of the candle shows the maximum and the minimum of the price inside the time frame.
This is a candle drawn over the price movement to clarify:
The time frame that we will use in this site is the daily time frame, also know as daily chart where every candle represents a day of price movements.
In this article I will explain the bare minimum to understand what you are seeing, in later articles I will explain in detail every element of the chart.
First of all: where is the price line?
The chart that we use for technical analysis (but we should call it statistical analysis of the price progression) are an evolution of the line charts.This is how a line chart looks like:
It is done connecting with a line the price point of every single time frame. For example if the time frame is a day you can have a point at the price of the stock for that day and then connect every point:
This is good but not the best: every time frame, let's say every day, the prices move up and down, how can you make a decision about which price use as point for the day?
You can use the closure price or the average or the weighted average or the open or the maximum or the minimum or who knows!
In every time frame however there are four price points that are statistically relevant: the opening price for that time frame, the minimum, the maximum and the closure price.
We should draw all this four points in our chart and then figure out a way of connecting them together with a line, or four lines or... enter the candlestick chart!
The candlestick chart 101
The charts that you see on this site are all candlestick charts: for every time frame you have a so called candle. It is a rectangle in green or red with a line on the top and a line on the bottom.
I think now you are already guessing how it works! The top and bottom of the rectangle are the opening and closing price of the time frame; which is which is shown by the color of the candle.
If the color is green the time frame has been a positive movement of price so the open price is at the bottom and the close price is at the top. If the color is red the opposite: the time frame has been a negative movement so the opening price must be the top and the closing the bottom.
The bar on top and bottom of the candle shows the maximum and the minimum of the price inside the time frame.
This is a candle drawn over the price movement to clarify:
The time frame that we will use in this site is the daily time frame, also know as daily chart where every candle represents a day of price movements.
What are the curve lines above the candlesticks?
The orange and red lines are the called simple moving average or SMA and they are an approximation of the price in every time frame calculated as the average price of the preceding n time frames.
For example the orange line is called SMA 50 and in every day of the chart (every candlestick) it represents the average price (usually average closing price) of the previous 50 days (candlesticks).
We will discuss SMA and their interpretation in future articles.
For now just remember that SMA50 and SMA200 are heavy used.
In the chart above you can see how the prices reacted after "touching" the red SMA200 and how have been "contained" by the orange SMA50. Look also how they "jumped" (gapped) the SMA50 before leaving the red area (channel).
Channels and Trendlines
The red and green areas in the chart are called channels: they are areas where it is most probable the prices will stay, something like the atomic orbitals of the electrons, just waaay more simple and in 2D. When the prices goes off the channel it is a statistical relevant event, just like when an electron jumps from one orbital to another.
Trend lines are like channels, only in 1D. So it is relevant every time the price cross them.
Volumes
The fifth most important data in a time frame after the open, close, max and min price is the volume.
The volume is the number of stocks exchanged in the time frame.
Usually it is drawn as a bar in the lower part of the chart. The higher the bar the higher the volume that day.
Volume as we will see is a key indicator to validate or dismiss a price movement.
Indicators
Indicators are functions applied to prices and volumes and time and are used to better understand and filter the price movements.
Dozens of indicators exist, but the most used are fewer.
Here in the picture you can see two of them: the Stochastic Oscillator on the top and MACD on the bottom.
Other used indicators are RSI, OBV, SMA (seen before).
How to read an indicator is a long chapter and will be explained in future articles.
Bearish Bullish Long Short
Worth mentioning that when the prices are going up it is a positive trend, also called bullish or long.
When prices are going down it is a negative trend, also called bearish of short.
When prices stay at the same level it is called lateral or compression, or accumulation/distribution.
We’re going to break down stock trading training for beginners so it doesn’t seem scary. One of the first things you need to do when you start out is to pick a good broker. A stock broker is going to be where you do all your business. Picking one that has large commissions and fees can be detrimental to a beginner.
RispondiEliminaAn important second step is going to be learning how to read a stock chart. The stock chart holds all of the clues to which direction the stock is going to move. Watch our ThinkOrSwim video on charts setup.
Another great resource for learning to read a chart is stockcharts.com. They have a chart school for any questions that you might have. Charts can look like Greek when you’re starting out. The more you look at a chart, the more you’ll understand it and be able to predict trends.
We’re going to break down stock trading training for beginners so it doesn’t seem scary. One of the first things you need to do when you start out is to pick a good broker. A stock broker is going to be where you do all your business. Picking one that has large commissions and fees can be detrimental to a beginner.
RispondiEliminaAn important second step is going to be learning how to read a stock chart. The stock chart holds all of the clues to which direction the stock is going to move. Watch our ThinkOrSwim video on charts setup.
Another great resource for learning to read a chart is stockcharts.com. They have a chart school for any questions that you might have. Charts can look like Greek when you’re starting out. The more you look at a chart, the more you’ll understand it and be able to predict trends.