To learn the fundamentals of stock chart analysis, you must take one element at a time, learn it, and see where it can be applied.
What is a Stock Chart?
A stock chart is a series of sequential price fluctuations plotted over a set time period. On the stock chart, the vertical line represents the price scale, and the horizontal line stands for the time period that the price scale is charted over. Prices on a stock chart are plotted from left to right.
A security is a stock, bond, commodity, future, market index, or a financial instrument that can be sold. Anything that can be sold on the stock exchange can be charted for variations and patterns over a period of time.
Daily and Intradaily:
Data registered on a stock chart can be compressed or averaged over a specified time period, such as daily, weekly, monthly, etc. – whichever measurement applies to the nature of the data being charted. Information can also be analyzed throughout the day at set times, making this information “intradaily” data. The problem with this type of analysis is that the data appears more volatile and can distort the overall picture of whatever trend is emerging. Daily and intradaily charts are used to chart short-term price movements but should never be interpreted as long-range predictions.
Weekly and Monthly:
Charts detailing weekly and monthly data are better predictors of long-term securities activity. Because the daily and intradaily activity is compressed and are just a piece of the weekly and monthly variation, price movements form a broader, more accurate picture of what an instrument is actually doing. Volatility is toned down, and a true picture emerges.
Variations:
By using a combination of short and long-term predictors, investors can look more carefully at what is happening to a security in the present and compare it to its historical activity.
Another variation of the charting theme is recording movement via opening data and closing data. Closing data is considered a better trend indicator than opening data. This is because the stock has been performing for an entire day before the data is registered.
Different charts used in charting securities are bar charts, candlestick charts, point-&-figure charts, and price scaling, which take the same data and record it in different patterns.
Evaluation:
No method of charting is considered superior to another. Each type of charting uses the same information in different patterns, depending on what is being considered. The most important point on charting a security is to keep it current and analyze it daily, weekly, and monthly for emerging patterns of volatility and growth.
Sources:
How to Read Stock Charts. (2009). Independent-Stock-Investing.com. Retrieved on February 14, 2011, from http://www.independent-stock-investing.com/Read-Stock-Charts.html
What are Charts? (2011). StockCharts.com – ChartSchool. Retrieved on February 14, 2011, from http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:what_are_charts
Chart Analysis. (2011). StockCharts.com, – ChartSchool. Retrieved on February 14, 2011, from http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis
Bain, B. (2007). Stock Charts, Understanding the Basics. StockTradingToGo.com. Retrieved February 14, 2011, from http://www.stocktradingtogo.com/2007/04/30/stock-charts-understanding-the-basics/