All Details regarding Technical Stock Charts and Their Types

Money, money and more money! Prices are everything, even in stock markets. If you purchase a stock at the wrong price, a good stock can turn out to be a loss-maker. This is why you should know what a chart is.

Technical analysis is about getting the price right. This analysis even plots market trends with stock prices. This action takes place in a place called "stock chart".

Technical analysis begins with the analysis of market trends. Historical stock charts are required for trend analysis. Because trends can only be found in charts, To excel in technical analysis, it is important to know what a chart is and how to analyze stock charts.

This section will explain what a chart is and briefly discuss stock charts. We'll also learn what trend lines are, and how they can be combined to stock charts to help us make meaningful deductions about stock price movements.

What stock charts?

As we have discussed, technical analysis is not possible without stock charts. It's like building a house on land that you don't own. We must learn how to read charts. Before we go any further, let's answer the question: What is a stock graph?

It is simply a graph that shows how stock prices or trading volumes have changed over the time. You can present this relationship in many ways using different types of charts. As a technical analyst, it is your responsibility to find the most effective type of chart that will reveal hidden trends.

Stock charts have the same axis as all other charts: the vertical axis is horizontal, and vice versa. The horizontal axis shows the historical periods for which technical charts have been created. The vertical axis shows the stock price and trading volume for each period.

Technical analysis can be done with many different types of charts. The most popular types of charts for technical analysis are the line chart, bar chart (point and figure), candlestick chart (point and figure), and the bar chart. These technical charts will be discussed in detail later. Below, however, are three types of stock charts. The bar chart is very similar to the candlestick chart. All charts below are stock price charts. You may need to alter the nature of the input when switching between types of charts.

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Line Diagram

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Figure and Point Chart

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Candlestick Diagram

What is trend line and length?

Once you have mastered the various types of charts, you will need to learn how to read them. Let's first look at the trend lines and the trend lengths, which are the main tools for analysing technical charts. Let's take a look at each one:

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Trend lines are straight lines. They smoothen out any 'waviness’ in charts and highlight the hidden trends in stock charts.

We used two trendlines to create the chart above - one for each top and bottom. Channels are a combination of trend lines. It allows us to determine whether the trend is going up or down. Think back to the discussion about market trends. For example, a stable uptrend is not just marked by an increase in tops but also an increase in bottoms. You can only comment on one trend line. You must use multiple trend lines to spot a trend. Also, create a channel.

• Trend lines A trend line is a straight-line connecting all the tops and bottoms of stock charts. In one of the sections that preceded this, we discussed trend lines. We will now focus on their utility.

  Trend lines are important because sometimes trends are not as-clearly apparent in technical charts. How often we see zigzag patches! These make stock analysis difficult.

  External aid is required to reduce distortion. Consider the example of the previous line chart. Below is an example of the line chart we saw earlier. We have added some details to it. Take a look at the highlighted section. There is no way to tell whether the trend in price is upwards or downs at the beginning. This section does not have clear tops or bottoms that are clearly moving higher or lower. So how do you proceed with your chart analysis? Trend lines can be helpful in this situation. This is exactly what we did.

• Trend length When analysing technical charts it is important not only to spot trends but also to predict their length. This topic was covered in the section on market trend. Primary trends are those that last the longest and cause the largest changes in stock prices. If the trend is strong, it will be able to make a significant impact on stock prices over a long period of time. Sometimes secondary trends or minor trends are not able to make a significant impact. They might be a passing fad. Patterns in charts can help predict the longevity of a stock market trend. An analysis of the trend lines can be a good place to start. Trend lines that indicate an uptrend are those where the stock price rises before falling. The trend can only be confirmed if the falls are smaller simultaneously. Other measures that can be used to evaluate the long-term conviction and longevity of technical charts include head and shoulders, inverted head and shoulders and double tops, double bottoms, and double tops. These will be discussed in the next section.

What are the various types of charts?

We have already discussed that there are four main types of stock charts used for technical analysis. These are:

• Line charts: The line chart is what you might automatically think of when you think about charts. The line chart shows the stock price and trading volume information on either the horizontal or vertical axis, as well as the time period on the corresponding x-axis. The trading volumes are the total number of shares that a company bought or sold on the stock exchange in a given day. Commonly, the closing stock price is used to construct a line chart.

  After the axes are labeled, it is possible to create a line chart. This is done in two steps. The first step is to choose a date and plot the closing stock prices as of that date on the chart. To do this, place a dot on your chart so that it is above the relevant date and beside the stock price.

  Let's say that the closing stock prices on December 31, 2014 were Rs 120. You will plot it by placing a dot so that it is above the marking of the date on the right-hand axis and beside the mark that reads Rs 120 on your left hand axis. This will be repeated for all dates. The second step will be to connect all dots that have been drawn with a line. That's all! Now you have your line chart.

• Bar charts Bar charts are similar to line charts. It is more informative, however. Each marking on a bar graph is not a dot. Instead, it's a vertical line that has two horizontal lines protruding from it. The highest stock price a stock traded at in a given day is indicated at the top of the vertical line. On the other hand, the lowest price it traded during the day is at the bottom. The horizontal line to its left indicates the opening price of the stock during the trading day. The price at which the stock closed trading day is indicated by the one to the right. Each mark on a bar graph tells you four things. Below is an illustration of the marks on a bar graph:

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  Bar charts are more useful than line charts because they show volatility in prices. Intraday charts are charts that show the type of trading that occurred that day. The difference between closing and opening prices is greater the longer the line. This is a sign of higher volatility. High volatility can mean high risk. This is why you should be curious about volatility. How comfortable would you feel about investing in stocks that fluctuate frequently and abruptly?

• Candlestick charts Bar charts are not as useful for candlestick charts. They offer it in a more readable format. A candlestick chart, like a bar chart with different vertical lines, is made of rectangular blocks that have lines running on both ends. The highest day's trading price is indicated by the line at its upper end. The day's lowest trading prices are indicated by the line at the lower extremity. Intraday charts can show the day's trading. The block (also known as the body) shows the day's opening price and closing price. The higher one is at its top and the lower one at the body's bottom.

  Candlestick charts are better than bar charts in that they provide information about volatility over the entire period. Bar charts only show volatility for each trading day. A candlestick chart has two colors: light and dark. They are normally whiter if the closing price is higher than the opening price. They are usually lighter in colour on days when the closing prices were higher than the opening. The price volatility during the period was affected by the greater the colour variation. This is how candles appear on a candlestick charts:

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• Figure and point charts Point and figure charts are not the same as the three types of charts mentioned above. It was widely used before computers were introduced to stock analysis. It is only used by a small number of people these days. It is difficult to understand and only provides limited information. The point-and-figure chart shows the volatility of a stock's prices over a specified time period. It shows the stock price's movements over a given time period. It marks time intervals on the horizontal axis. The chart's markings are only in the form X's or O's. X's indicate the stock's rise above the limit and O's the decline below it. Box size is the measurement of the specified amount. It directly relates to the difference in markings on the box's y-axis.