● Parts of Charts
Fig 1.1 above is a stock chart in its simplest form. This section will go over each
part to ensure understanding.
In the upper left corner is the name of the company, Minnesota Mining & Manufacturing
Corp, with its ticker symbol (MMM) and the exchange it’s traded on, the NYSE.
[Hint: Depending on the charting software, the location and appearance of information
can slightly vary.]
Price Movement: The stock prices for MMM are represented with a red and black line.
Each point on the line corresponds to a closing price on the right vertical axis.
Red coloring is used when the stock price goes down; black coloring is used when the
stock price goes up. (Please note-- chartists almost never use a plain line to
represent the stock prices. We are only using a line chart at first to keep things simple.
Later chapters explain other types of stock charts.)
Price Axis: On the right vertical axis is the stock price, in this case marked 80, 90,
and 100.
Timeframe: In the upper left corner is the timeframe. This is extremely important.
In this case, the chart is a weekly chart, marked by “weekly” next to the MMM ticker.
Therefore, each point on the line represents one week’s closing price, i.e., where the
stock closed at the end of the day on Friday or whatever day the week trading ended.
Stock charts can be in any timeframe. For example, if we wanted a shorter timeframe
of the above chart, we could change it to daily, making each point on the line a daily
closing price instead of a weekly closing price.
 Fig 1.2
Price Details: Right below the MMM stock ticker symbol are the details about price
which have been enlarged in Fig. 1.2. (Looking at these is easier than taking a ruler
to the chart to figure exact numbers)
First there’s the date, then there’s the opening price (O), the high price (H), the low
price (L), the closing price (C), the volume (V), and the Change (Chg). These details
normally apply to any point on the chart that you click on. For this handbook, though,
most prices will describe the last point, or farthest right, on the chart.
Open (O) means the opening price for whatever timeframe you’re using. In Fig 1.1,
because it’s a weekly chart, open means the stock’s opening price at the start of
the week. For the last week on the chart, the opening price was $79. (Notice that
although the stock opened for the week at $79, the line never goes as low as $79.
Why? That’s because in line stock charts, only the close is plotted, meaning any
movement lower or higher than the close won’t be shown...that’s the problem with
line charts.)
High (H) means the highest price that occurred during whatever timeframe you are
using. In Fig 1.1, it’s a weekly chart, so this means that during the entire last week
that MMM traded, $89.25 was the highest price that it reached. Again, because of
this is a simple line chart, the line never actually touches $89.25 during the last
week. The line stops at $85.88, where MMM closed for the week.
 Fig 1.2
Low (L) means the lowest price during whatever timeframe you are using.
Close (C) means the close of whatever timeframe you are using. For the
above chart, close means at the end of the last week, MMM finished at $85.88.
Volume (V) means the total volume during your set timeframe. Using the
above example, during the last week on the chart, 10 million shares of MMM
traded.
Change (Chg) means the change from the last close to the one before it.
From the close of the last week, to this week’s close, MMM gained $4.38.
● Which Timeframe to Pick?
How do you decide among daily charts, weekly charts or monthly charts?
The answer is that it depends on what you’re trying to do. If you are planning
on holding a stock for a few days, then you should use a daily stock chart;
a few weeks, a weekly chart, etc. It is helpful, however, to have the bigger
picture in mind even if you plan on trading short term so you don’t get
tunnel vision. Try to look at several timeframes when learning technical analysis.
● What’s Wrong with Line Charts
As was mentioned before, chartists almost never use line stock charts like the
ones shown before and in Fig 1.3 above—it was only used in this intro for simplicity’
sake.
Remember how a stock’s price could go lower or higher than the closing price before
it closes, but the chart wouldn’t show it? That’s the problem with line charts; they
only show closing prices, not highs and lows.
To get more information, most users of technical analysis use either bar charts
or candlestick charts, which are simply different ways of showing stock prices.
Bar and candlestick charts are more accurate because they visually represent the
close, the high and the low, making them superior stock chart formats. Continue
reading to learn more about bar and candlestick charts.
Bar Charts
● Introduction to Bar Charts
Fig 1.4 above is a simple example of a bar chart for Sun Microsystems (SUNW).
Pretty much all bar charts will look like it. On left is an enlarged bar showing its
properties. As you can see, if the lower horizontal bar is facing left, and the upper
horizontal bar is facing right, then it’s an up bar; the inverse would be a down bar.
As you can tell, you don’t need to look at the detailed price information at the top
to see highs, lows, etc. because the bars themselves show them. However, it’s still
useful to have the detailed price information available because sometimes it’s difficult
to eye up the exact numbers.
Let’s take an even closer look at the stock chart above to review what we’ve already
learned. If you look at the upper left corner of the chart, right below the
“Sun Microsystems, Inc.” label, you’ll see the words, “SUNW daily.” That is the timeframe,
in this case daily, meaning that each bar on the chart represents one day.
If you look at the far right of the chart you’ll see the last bar highlighted in yellow which
corresponds to March 14th’s stock prices. You’ll notice that the bottom horizontal bar is
facing right, and the above one left. That means March 14th was a down day,
i.e. SUNW finished at a lower price than it opened. The upper horizontal bar is the
opening price, and the lower horizontal bar is the closing price. If you’d like the precise
numbers for the high, low and close, you can still refer to the detailed price information
at the upper part of the chart: On March 14, 2002, SUNW opened (O) at $46.12,
had a high (H) of $47.38, had a low (L) of $43.38 and closed (referred to as “last”
when it’s the last bar on the chart) at $43.69.
Helpful Hint: Change (chg) refers to the difference between yesterday’s
closing price and today’s, not the difference between today’s open to today’s close.
Japanese Candlestick Charts
● Introduction to Japanese Candlestick Charts
Japanese Candlestick charts are just another way of visually representing
stock prices. They’re called “Japanese candlestick charts” because they
originated in Japan some 300 years ago. Many people find them easier to
read than bar charts.
Figure 1.5 above is the same daily chart of SUNW that you just saw,
but now it’s in a candlestick chart. White candles are up days, and
black candles are down days. If it’s a white candle, then the bottom of the
candle body is the opening price, and the top of the candle body is the closing price.
For black candles, the top of the candle body is the open, and the bottom of the
candle body is the close. The lines (or candle wicks) extending from the top of the
candlesticks are the highest price for that period, and from the bottom of the
candles the lowest prices for that period. Studying fig 1.6 gives a good understanding
of candlestick basics.
If you look at the far right of the chart you’ll see the last bar highlighted in yellow
which corresponds to March 14th’s price action. You’ll notice that it’s a black bar.
That means March 14th was a down day, i.e. SUNW finished at a lower price
than it opened. The top of the candle body is the opening price, and the bottom
of the candlestick body is the closing price. The line extending from the top of the
candle is the high, or highest the stock went during that day. The line extending
from the bottom is the low, or lowest price of the day. Again, if you’d like the
precise numbers for the high, low and close, you can refer to the detailed price action
information at the upper part of the chart.
Candlestick charts have become so popular that they have their own
subdivision of technical analysis. There are entire books written exclusively
on how to use candlestick charts. This guide won’t go into any of the complex ways
of using them, but it will almost exclusively use candlestick charts from now on,
as they’re often easier for beginners to understand.
Patrick Abboud
| 
No comments:
Post a Comment