Charting Stocks: The Why & How
What is the purpose of charting?
Charting is a pretty crucial subject for traders who are serious about analyzing stocks. Charting is what provides you with the price action history of the stock. You can view price history from year to year, monthly, daily, to as short as seconds, tick by tick.
If you are able to excel at technical-analysis through charting, then you will be more likely to determine future price action to be bullish or bearish when analyzing certain setups. It’s not a perfect science of course, but technical analysis can provide assistance or affirmation in your trading picks both on short term and long term outlook.
Types of charting
Charting is very flexible in how you wish to use it. Some forms are very basic, while others are very advanced. Here are the most common types of charts to use…
Candlestick/Japanese Candlestick – These types of charts can be tracked back as far as the 1700’s where Japanese rice merchants used them to track the price of rice futures. Candlestick charting was introduced to the USA in 1991 with the popular book titled “Japanese Candlestick Charting Techniques” by Steve Nissan.Â
From there, the candlestick chart has become the normal default for most all platforms and traders. These charts display open, low, high, close for each unit of time. While one of the most insightful chart types, it may be overwhelming for beginners to grasp. More about candlesticks below…
Volume at Price (VAP) – A newer chart type that shows the number of trades at a particular price level instead of volume for a specific period. This helps display at what price level most of the trades are taking place, meaning the most interest of buyers and sellers is at those levels. These types of charts help gain visibility into the market psychology both in time & price. Not all stock charting platforms offer this yet, but be on the look out.
Line – Arguably the simplest of charts. This shows the price action represented by a line drawn using the close price for each unit of time.
Bar – High Low Close (HLC) – An improvement from a basic line chart, the HLC Bars provide additional data in the trading period, including the high, low, and close for each unit of time.
Bar – Open High Low Close (OHLC) – This includes the open and close for each unit of time. Traders who use bar charts will use this, as it displays the complete action in the bar.
Point & Figure (P&F) – These charts do not actually show timeline, instead it is made up only of price swings. This can be easy to learn but very time consuming.
Candlestick Introduction
Let’s quickly breakdown what a candlestick is if you don’t know already… Since this is the most popular and common type of charting, we want to provide you with the best and most simple information you need to completely grasp the idea of candlesticks. Once you grasp and visualize what a candlestick actually is, you will be able to understand charting at a high level.Â
Where they originate from is interesting, but not too important to your trading. However, there’s a lesson within it, and that lesson is that trading emotion is real, and it’s used to foreshadow and predict price movements. Candlesticks were invented in Japan over 100 years ago, before Westerners developed a version of their own, called the bar and point-and-figure charts.Â
It all began when a Japanese man named Homma said that there was a huge emotional aspect to the supply and demand of rice. With the rice market impacted by traders emotions, he used charting now known as candlestick charting to help understand market movements visually. You can learn more about candlestick patterns in our dedicated Candlesticks 101 Guide!
Get Your Charts Set Up
All traders will have a different preference on how they view their charts. Some traders will use different time frames, studies, indicators, etc. What is important, is that you use what is comfortable for YOU. Believe it or not, you don’t need fancy charts with fancy indicators. A simple setup will really get the job done. As you begin to understand more and settle in as a trader, this is when you can choose to explore new indicators or studies for your charts.
Common Chart Setup For Day Trader
Time Frame – 1 minute, 5 minute, 15 minute
Studies/Indicators – Volume, Volume Weighted Price Average (VWAP), 7 day exponential moving average (EMA), 20 day EMA
Common Chart Setup For Swing Trader
Time Frame – 15 minute, 4 hour, daily, weekly
Studies/Indicators – Volume, 20/50/100/200 day EMAs, Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD)
Click here to learn more about Volume, Moving Averages, RSI, MACD & VWAP.
There is certainly no shortage of charting options, and it will ultimately come down to personal preference. You will most likely find yourself trading the familiar candlestick charting that is so wide spread today. Learn more about the charting platform we recommend for anyone who needs a third party charting solution for stocks & cryptocurrencies.
If you ever have questions about chart setups, don’t feel hesitant to reach out!, charting, or anything related to stock and options trading on the market, hit us up by filling out the form below!
