Chapter 2 Stock Market Charts

Charts

Charts capture price movements of a stock over specific time frames. These are graphical representations of how stock prices moved in the past. Typically, the x-axis represents time and the y-axis represents price. A Chart can also depict the history of the volume of trading in a stock. That is, a Chart can illustrate the number of shares that change hands over a certain time period.

Three of the most commonly used Chart types are:

• Line Chart

• Bar Chart

• Candlestick

Line Chart

When you draw a line connecting the closing prices of a specific stock or index over a given period of time you get a Line Chart. It is particularly useful for providing a clear visual illustration of the trend of a stock’s price or a market’s movement. Line Chart is widely used by beginners to draw trend-lines.

Line Chart of Nifty

Bar Chart

A Bar Chart tracks four price points for each trading day - open, high, low and close. Bar Chart is one of the most popular charting techniques to see price action in a stock over a given period of time. Although daily Bar Charts are best known, Bar Charts can be created for any time period that can range from 1 minute, 5 minutes, 1 day, 1 week, etc.

Candlestick

Candlestick adds visibility to Bar Chart. Notations used in Candlestick are symmetric unlike the notations used in Bar Chart. A Candlestick displays the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that visually represents the fight between the bulls and bears. Each Candlestick represents one period (e.g. a day) of data.

Logarithmic (Ratio) Vs. Arithmetic Scales

Scaling is an issue that is often overlooked in Technical Analysis. There are two axes on any market chart. The x-axis along the bottom, registers the timeframe and the y-axis, the price. There are two methods of plotting the y-axis: arithmetic and logarithmic.

Arithmetic

Arithmetic charts allocate a specific point or Rs amount to a given vertical distance. The arithmetic scale suppresses price fluctuations at low levels and exaggerates them at high points.

Logarithmic

A logarithmic scale allocates a given percentage price move to a specific vertical distance. There is very little difference between the scaling methods when charts are plotted over short periods of time. However, for analysis of charts over a long time frame, it is better to make use of logarithmic scale.

Key Takeaways

• Chart depicts the historical price, volume action of scrip.

• Line Chart, Bar Chart and Candlestick are the most commonly used charts in Technical Analysis.

• Candlestick provides the most price information to a trader in one go compared to the rest two charts.

• Over a short term time frame, there is very little difference between the two scaling methods. For longer time frames, it is better to use logarithmic scale.