Stock chart basics for beginners

How many types of charts are there, what do they mean, is it good?

For those who are just beginning to trade, most likely you’ve seen all the stock graphs and charts in movies — with two, three, four, or more screens glaring with lines, graphs, and numbers moving ever-constantly, but what do all that mean, and how do you get a hang of it?

This article aims to let you familiarize yourself with the kinds of charts out there and what each of them entails first.

If you’re already familiar with the different types of charts, you can move further by checking out the different patterns that these charts show here

What type of charts are there?

1. Line

The line chart is probably the most common type of chart you will find anywhere. It’s there on the news, it’s there on the company’s performance reports and it’s there in almost every image you’d find when you search for the word “graphs”.

In the context of stock, the line graph refers to the closing price of each period. For example, you set your graph to show the daily price, which is — how the graph is moving in each day, perhaps in a period of one month.

So, what you’re basically seeing is the closing price for each day in that month. In simpler terms, for this graph, you will see how the price of the stock is doing each day, based on the last price of the stock each market day.

For example, based on the picture above (we use Apple as an example, NASDAQ: AAPL), you see that on October 10th, 2022, the price is at $140.01. What this means is that on October 10th, when people are done with their day and the stock market is about to go to bed, Apple’s price is at $140.01.

Pros of Line Graph

It is good for you to get a general view of how the stock is doing for reporting, or to see the historical performance of the stock. This is due to the fact that it tells you how well the stock is performing each day.

Thus, if you must do a report to see how well Apple is doing after Tim Cook took over, for example, you can simply look at the line graph to see how the stock price moves.

Cons of Line Graph

This is not the best graph if you’re doing day trading*. Why so? That is because a line graph only tells you how the stock is doing when the market close.

Of course, you’ll get a glimpse of what’s going on if the stock suddenly closes at a huge downturn, but even that is not sufficient for you to truly understand the market sentiments to ensure you’re putting on a winning bet.

*Day trading refers to investors who buy or sell assets on a day-to-day basis to make a profit from short-term price movements.

2. Candlesticks

Candlestick is the most commonly used chart, especially among day traders. The reason why this centuries-old chart that once was used to measure the price of rice in Japan is so famous among day traders is due to the information that it gives.

To understand this, we must look at the components of a candlestick chart. First, we look at the color:

Sample of the candlestick bar

Based on the picture above, we have A (green) and B (red). So, what the color tells us is-

Green: The price opens low, but closes at a high (up)

Red: The price opens high but closes at a low (down)

 

Red: Price closes lower | Green: Price closes higher

So, whenever you see a green bar, you will just have to know that on that particular day, the price opens at a low, but closes at a high. Even when the graph seems relatively lower than the previous day.

Why is the bar green when the price today is lower than yesterday’s price?

That is because the bar assesses the performance of the day from the time the market opens up until when it closes on the same day, or month — depending on which settings you put on your chart (1 day, 1 month, 1 year, 5 years, etc.)

Next, the most important part of a candlestick is the “tail” part, as circled below:

 

The tail represents the range of price movement for the day

What is that tail and why is it so important?

The tails indicate how the price of the stock has moved for the day, and price movements indicate market sentiments. To illustrate this more clearer, we’ll show you a candlestick bar that is much more interesting.

 

This is usually called “the inverted hammer”

Why is this red Mjolnir (Thor’s hammer) so interesting? What it shows is first, it is red — which means that at the end of the day, the price went lower than how the day started.

Second, the most interesting part is how the tail went up so high — which indicates that traders have tried to push the price up high, but in the end, the majority of them went “nope” and decided that they are selling it for less. This is usually a sign of weak sentiment in the market.

The contrary would be if the bar is upside-down, where the hammer’s handle is below, it shows that the price went down so low, but perhaps these traders had some good coffee for the day and decided “yep, it’s worth it” and rallied the price up a bit.

So what these candlesticks show you are — the opening price of the stock, the closing price, and the range of price that the stock went through for the day.

Pros of Candlestick Graph

It contains a lot of information, especially on daily market sentiments which are detrimental to daily traders who choose to buy and sell based on market sentiments.

Cons of Candlestick Graph

It can be a bit confusing to understand at first, and the whole market sentiment thing can be misleading when you’re trading. All in all, keep in mind that nothing is sure in life — apart from death and taxes. So, sometimes the sentiment seems weak, but the price rallies nonetheless, and vice-versa.

3. Bar chart / Open-high-low-close (OHLC)

Open-High-Low-Close (OHLC) is similar to the candlestick, only that it’s much more simplified, whereby the opening price is put on the left side of the line, while the closing price is on the right side.

The color pretty much indicates whether the closing price is higher or otherwise, and the vertical line indicates the movement of the stock price for the day, much like the ‘tails’ in the candlestick bar.

The open price is shown on the right and the close price is on the left

The pros and cons of this graph are pretty much similar to those of candlesticks, but let’s just say that this one is easier to understand.

4. Point and figure chart (P&F)

This chart simply tracks price movements without actually looking at the time frame. Alright, we’ll explain it to you, but first — as you can see from the picture above, there are X’s and O’s, much like tic-tac-toe. What do these X’s and O’s mean?

X is marked when the price moves up, and O is marked when it moves down. Usually, one X mark indicates a certain price. If you look at the picture above, on the left and right sides of the chart, there are numbers, and these numbers refer to the stock price.

From the picture above, the price moves at a $2 interval — so, one X or O refers to a movement of 2$ up or down for the stock price.

So, how this chart is built is that whenever the price of the stock moves up by $2, that’s one X mark. Regardless of how long it takes for the price to move that much. It’s kind of like playing bingo, whenever you hear a $2 you put a mark on the chart.

“So, if theoretically, the stock price doesn’t move at all for a year then the chart will be mostly empty?”

Yes. Pretty much.

Also, it’s not like this chart doesn’t give you information about the time at all. If you look at the image below, there are red numbers, that indicate the month (1=January, etc.). It’s just that time is not their main priority, that’s why you can see the distance between one month to another may vary.

A snippet of NASDAQ: AAPL’s P&F chart

Another thing is, there are a few rules in marking this chart:

First, X is always up, up, and up! While O is always down, down, and down!

Second, the whole column can only contain one symbol, that’s why you can see there is no column with a mixture of X’s and O’s.

So, how it works is that whenever there’s a reversal (change of direction) it will move to a new column. For example, on the left-most side of the image above, we can see that there are three X’s, which means that the price is rallying up to $178, before falling to $176, and way down to $168.

Another rule is that, if you want to move to a new column, the fall (usually) must be by the value of 3 boxes — in this case, it’s by $6. However, this 3-box rule is up to you who will adjust the settings of the graph.

Pros of P&F Graph

This graph is usually used by medium to long-term traders since it eliminates all the ‘noise’ and lets you focus on price movements only. Sometimes the price seems to be moving very weakly when you look at it in short term, but long-term-wise, the price actually is growing pretty well.

Cons of P&F Graph

This graph isn’t time-based, so for traders that consider time as the essence of their investments, this graph might not suit them, especially daily traders who seek short-term gains.

Key Points to Understand

  • There are generally four types of charts usually used by traders in assessing stock prices — line, candlestick, OHLC, and P&F.
  • The line graph represents the closing price of the stock at a given time period and is commonly used in reports.
  • Candlestick graph contains information about the open price, close price, and the range of price (high and low) that the stock went to in that particular period.
  • OHLC is another version of the candlestick graph.
  • Candlestick and OHLC are mainly used by daily traders since it provides insights into short-term market sentiments.
  • P&F graph focuses on the price movements and not time. It is commonly used by middle to long-term traders.

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