In our Stock Market Made Simple blog series, we introduced the concept of a stock chart and covered the information they provide to traders, which you can read here. Today, we are going to delve deeper into stock charts as it is taught in the first Foundations of Stocks and Options Level 1 class.
A stock chart is a graphical representation of a company's past stock performance. It displays through simple graphics the previous price points where people buy and sell a company's stock. Understanding the pivot points of support and resistance can be useful when predicting future performance of the stock in question. Plus, if you look close enough at individual chart candles and various candlestick patterns, they can reveal the trader sentiment behind a company's stock performance.
There are three main versions of the stock chart, which a trader can use: the line chart, the bar chart, and the candlestick chart.
A line chart is created by using the closing prices for each day from the stock in question. Simple lines are drawn to connect each point to provide a very clean chart from which you can quickly determine overall trend and direction. Line charts are also excellent when using technical analysis to find points of support and resistance. See below for an example of a line chart using Adobe.
However, line charts have some limitations as well. They only show the closing price of the stock, which means other data factors such as open price, high price, and the low price are excluded. This, in turn, makes it hard to assess and place a trade by only using a line chart.
A bar chart is a step up from the line chart as more actionable information is added to the chart. While the line chart only tracks the closing price, a bar chart tracks four different price points: the opening price, the closing price, the high price, and the low price. The horizontal lines to the left and right display the opening and closing prices of the stock, and the vertical line displays the high and low price of the stock. If a stock closes higher than it opened for the day, the bar might be colored green or black. If a stock closes lower than it opened for the day, the bar might be red. See below for an example of a bar chart using Adobe.
The downside to a bar chart is the bars tend to run together after a while and can be confusing.
A candlestick chart displays the same information as a bar chart; however, it does it in a slightly different way, which can be a little easier to read and digest. While the bar chart using a single vertical line to show the opening and closing prices for the day, a candlestick chart uses a wider shape called a 'body.' See below for an example of a candlestick chart using Adobe.
Due to the graphical difference from the bar chart, a candlestick is better at emphasizing the difference between the opening and closing prices of a stock. A candlestick chart allows us to see all the relevant data points of the day, it uses colors to make identifying price point quick and easy, and it offers insight into trader sentiment in a cleaner format.
In closing, all three charts have their uses. The line chart is great for clearing showing trends by using a stock's closing price. The bar chart expands on a line chart by showing four price points: opening, closing, high, and low. While the candlestick chart mirrors the bar chart in the provided data points but does so in easier to read format. Again, all three charts have their uses; however, at TradeSmart, we tend to stick with the candlestick for most of our charting needs.
If you wish to learn more regarding this topic, please consider signing up for our Foundations of Stocks and Option class, which you can do here.