Stock charts are graphical representations of price and volume movements. They visualize the price action by plotting the historical market data. The visual representation causes easier identification of the common and rare price patterns.
The technical analysis of the charts answers questions about the price action. Questions like, “What’s the support and resistance?”, “How about the trend and where is the stock going?” The answers to these questions are determined with time.
The stock charts make it easy for traders to map out the price history. They are also able to map out a forward trajectory, hence making better and informed trades.
Technical analysts use various charts depending on the information they need. However, there are three types of stock charts that are common:
- Line charts
- Bar charts
- Candlestick charts
How Important Are Stock Charts In Trading?
Investing in the stock market requires investors to be cautious. They should also have a bit of knowledge about the market. This will enable them to continue getting profits instead of losses.
Stock chart technical analysis plays a crucial role in trading. It enables investors and traders to make informed decisions. Let’s now delve deeper into the importance of stock charts in trading.
1. Volume Charts
These charts are based on the number of shares being traded. The bars can even give more insights into the market action. That’s because they represent the actual numbers being traded.
With a volume chart, traders analyze how fast the market is moving. They do this by noting how many bars are printing and how fast. A good example is where one bar prints after every 1000 shares have traded on a 1000 volume chart. This happens regardless of the size of transactions.
What this means is that one bar can incorporate various smaller transactions. Alternatively, the bar might consist of one large transaction. Regardless, a new bar starts to print as soon as 1000 shares have traded.
Note that volume intervals are relative to the trading symbol. They are equally relative to the markets that are getting analyzed. The volume interval relates to shares when applied to stocks. It also relates to shares when applied to exchange-traded funds. As well as contracts when applied to commodities markets.
Remember that volume intervals are scaled to the attributes of individual symbols. That’s because securities that trade higher volume need a large interval to give relevant trade idea charting analysis. The normal interval for volume charts consists of larger numbers.
2. Line Charts
Line charts are the simplest kind of charts. A single line is enough to filter the market noise. And remember that market noise is one of the reasons why most traders fail.
These charts display the closing price while ignoring the price action. This helps traders to determine the true market nature. The chart also provides traders with a clean and easy-to-understand view of an instrument’s price. It’s also effective in the visualization of the overall trend of a stock.
Sometimes traders get overwhelmed with a lot of information when analyzing stock charts. Using stock charts that provide a lot of information gives traders multiple signals. This can lead to a lot of confusion and complex trading decisions.
But with line charts, traders can identify key support and resistance levels. They can also identify trends and recognizable chart patterns. Line charts are also ideal for beginners due to the simplicity.
Additionally, the charts help in learning the basic chart reading before getting to the advanced techniques. Also, traders can easily manipulate the chart by applying volume and move averages to line charts.
3. Candlestick Charts
This chart is used to describe the price movements of a security, derivative, or currency. It’s beneficial as traders use it to make trading decisions. The decisions are made based on occurring patterns. These patterns help in forecasting the short-term direction of the price.
The candlestick chart also shows traders the market’s open, high, low, and close prices. The chart has a wide part called the “real body.” This is used to represent the price range between the open and close of a day’s trading.
When the real body gets filled in or black, that’s to mean that the close was lower compared to the open. The real body being empty means that the close was higher than the open.
4. Tick Chart
Tick charts are important as they help traders to collect information about the market activity. This chart is based on a certain number of transactions per bar. This enables traders to see when the market is most active or barely moving.
An instance is where one bar prints after every 144 transactions on a 144-tick chart. The transactions include both small and large block orders. Every transaction is only counted once no matter the size. More bars print during high market activities. Likewise, few bars print during low market activities.
Tick charts come with a logical way of measuring market volatility. They also reduce the market noise just like is the case with the volume chart. This is important since the market noise distracts traders from the real picture of the market. The more the noise, the more difficult it gets to make intelligent decisions.
Usually, the noise is represented by useless candles with no value to the chart. Tick charts also make it easy for traders to spot swings. This is due to the build-up of small candles such as the ones on the time-based charts.
Additionally, time-based charts only show a long candle during high volatility periods. But tick charts show various smaller candles. That’s to say that tick charts give traders more information about the recent market swings.
5. Range Bar Charts
This stock chart is based on price changes. It allows traders to analyze the market’s volatility. For instance, a 10-tick range bar chart can print one bar whenever there are 10 ticks of price movement. Let’s assume that a new bar opens at 585.0 in this example. That bar will stay active until the price reaches 586.0, which can be 10 ticks up or down.
Immediately the 10 ticks of price movement occur, the bar closes and a new bar opens. By default, a bar closes at the high or the low of the bar immediately after the specific price movement is reached.
A range bar is important because a few bars will print during consolidation. This reduces the market noise experienced with other types of charting. The bars provide the same price information as time-based intervals.
Stock traders use stock charts differently, but the ultimate goal is the same. They allow traders to make informed predictions about the stock’s future price action.
For a lot of day traders, stock charts are the main source of data utilized in their strategy. These traders look for chart patterns, analyze the volume, and identify notable price areas. This in return boosts their chances of profitability.