How Stock Charts
Can Improve Your
Trading and Investing
Stock charts is one of the things you will need to look at frequently from now on. Ever heard of the phrase 'A picture is worth a thousand words'?
A picture is worth a thousand words
That's how valuable charts will be to you. For the trained eye, one look at a chart will tell him or her whether that stock is a good candidate or not.
It takes me less then 3 seconds looking at a chart to know whether I should invest in that stock or not. Some professionals still manually filter out good and bad stocks by looking at the charts.
It's really not that complicated. Actually, you will find it quite easy when you have learn a few chart patterns. We will look at those in another article.
What a chart looks like
Take a look at the above picture. It is the chart of the Dow Jones Industrial Average($INDU). That's how a chart looks like. The upper half is the stock price or index points. The bottom half is the volume.
In just a single glance, you can know what happened to the stock. In our case, we can see that the $INDU was at a high of 13800 points in December. Then it dropped to around 11700 in January and March before going up again to 13000 in May.
The rally in the $INDU could not sustain and it dropped below 11000 in July. It rallied from there and in August it is in the 11000-12000 range.
That was a long description of what happened right? But if you look at a chart, you can see the whole story in less than 5 seconds. A chart sure saves us a lot of time.
Type of charts
There are many different type of charts out there.
Japanese Candlestick Charts
This is the chart that you see above. It is called candlestick charts because the individual bars look like candles. The individual candle bars shows us the open, close, high and low of the day.
For our purposes we will be using candlestick charts in our analysis. I prefer to use candlestick charts because they give a better visual representation of what has happened.
This is how the same index looks on a line chart. On a line chart, only the closing price of the day is plotted. To be honest, there is not much use for line charts when it comes to analysis.
This is how the same index looks like on a bar chart. It is called a bar chart because each day's range is displayed as a vertical bar. Like candlestick bars, the individual bar shows us the open, close, high and low of the day.
It gives us much more information than a line chart. If you look at it closely, you will realise that it provides the same information as a candlestick chart.
The difference is, the candlestick bars are given a body from the open to close. Meaning, they just filled the open to close with a body and colored it. Because of that, it gives a better visual representation of what has happened in a stock.
There are still many people who use the bar chart to do their analysis. However, the candlestick stock charts are more popular and preferred by many traders and investors.
In the end, it really doesn't matter what type of stock charts you use. As long as you are making money, that's the right one for you.
Point and Figure charts
This is how the same index looks on a point and figure chart. Looks complicated right? Don't worry about this. You don't need to learn about this type of chart. I just put it here to show you another type of chart that people use.
I have introduced you to the many different type of stock charts. You can use whatever type of charts you like. However, it is best to focus on using candlestick charts. You will learn how to fully utilize this powerful type of chart in the Candlestick articles in the Advanced Section.
With this understanding let us explore the other articles in the Basics Section.
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