What Are Charts?
Dive into StockCharts' comprehensive guide and learn how charts drive informed investment decisions.
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Dive into StockCharts' comprehensive guide and learn how charts drive informed investment decisions.
Last updated
Was this helpful?
In a nutshell, a price chart is a sequence of prices plotted over a specific timeframe. If you're into statistical terms, charts are called time series plots.
In the chart below, the y-axis (vertical axis) represents the price scale, and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis, with the most recent plot being the furthest right. The price plot extends from August 24, 2018, to August 24, 2021.
Technicians, technical analysts, and chartists use charts to analyze various securities and forecast future price movements. "Security” refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures, or market indices. Any security with price data can be used to create a chart for analysis.
While technical analysts use charts almost exclusively, charts are not limited to technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over time, they can also greatly benefit fundamental analysts. A graphical historical record makes it easy to observe a security's performance over time, whether it's trading near its highs, lows, or in-between. You can also see the effect of key events on price.
The timeframe for creating a chart depends on the compression of the data—intraday, daily, weekly, monthly, quarterly, or annual. The less compressed the data, the more detail is displayed.
Below, you see an example of a daily and weekly chart.
Daily data consists of intraday data compressed to show each day as a single data point or period. Weekly data includes daily data that has been compressed to show each week as a single data point. A 100 data points (or periods) on the daily chart is equal to the last five months of the weekly chart (data marked in the red rectangle).
The more the data is compressed, the longer the timeframe possible for displaying the data. If the chart can display 100 data points, a weekly chart will hold 100 weeks (almost two years). A daily chart that displays 100 days would represent about five months. There are about 20 trading days in a month and about 252 trading days in a year. There's no right data compression and timeframe to use. It depends on the data available and your trading or investing style.
Traders usually concentrate on charts made up of daily and intraday data to forecast short-term price movements. The shorter the timeframe and the less compressed the data is, the more detail that is available. While long on detail, short-term charts can be volatile and contain a lot of noise. Large sudden price movements, wide high-low ranges, and price gaps can affect volatility, which can distort the overall picture.
Investors usually focus on weekly and monthly charts to spot long-term trends and forecast long-term price movements. Because long-term charts (typically one to four years) cover a longer timeframe with compressed data, price movements do not appear as extreme and there is often less noise.
Some investors might use a combination of long- and short-term charts. Long-term charts are good for analyzing the big picture to get a broad perspective of historical price action. After analyzing the general picture, you can use a short-term chart such as a daily chart to zoom in on a narrower range of time (e.g., the last few months).
There are different chart types. We will focus on the four most popular charting methods—line, bar, candlestick, and point & figure charts.
Some investors and traders consider the closing level to be more important than the open, high, or low. By focusing only on the close, you can ignore the intraday swings. Line charts are also used when open, high, and low data points aren't available. Sometimes only closing data are available for certain indices, thinly-traded stocks, and intraday prices.
Bar charts are popular among investors and traders. The high, low, and close form the price plot for each period of a bar chart. The high and low are represented by the top and bottom of the vertical bar and the close is the short horizontal line crossing the vertical bar (see chart below). On a daily chart, each bar represents the high, low, and close for a particular day. Weekly charts would have a bar for each week based on Friday's close and the high and low.
Bar charts can also display the open, high, low, and close (see chart below). The difference is the addition of the open price, which is displayed as a short horizontal line extending to the left of the bar. Whether or not a bar chart includes the open depends on the data available.
Bar charts can be effective for displaying a large amount of data. Line charts are less cluttered but don't offer as much detail (no high-low range). Each bar chart is relatively skinny, allowing users to fit more bars while keeping the chart comparatively neat.
If you are not interested in the opening price, bar charts are ideal for analyzing the close relative to the high and low. Bar charts that include the open tend to become cluttered. If you are interested in the opening price, candlestick charts probably offer a better alternative. But remember that when using candlestick charts, 200 data points can take up a lot of room, resulting in a cluttered chart.
Originating in Japan over 300 years ago, candlestick charts have become quite popular recently. The open, high, low, and close are required for a candlestick chart. A daily candlestick is based on the open price, the intraday high and low, and the close. A weekly candlestick is based on Monday's open, the weekly high-low range, and Friday's close.
Many traders and investors believe that candlestick charts are easy to read, especially the relationship between the open and the close. Hollow candlesticks form when the close is higher than the open, and filled candlesticks form when the close is lower. The rectangular area between the open and close is called the body (hollow body or filled body). The lines above and below are called shadows and represent the high and low.
Some candlestick charts use color to show the relationship between the close and the previous close. If the close is higher than the previous, you can choose to display the bar as green; if it is lower, you can choose to display the bar as red (see chart below).
See this ChartSchool article for more information about candlestick charts.
All the charting methods mentioned above plot one data point for each period. Regardless of price movement, each day or week is represented by one point, bar, or candlestick along the time scale. Even if the price is unchanged from one day to the next or one week to the next, a dot, bar, or candlestick is plotted to mark the price action. Contrary to this methodology, point & figure charts are based solely on price movement and don't take time into consideration. There is an x-axis, but it doesn't extend evenly across the chart.
The beauty of point & figure charts is their simplicity. Little or no price movement is deemed irrelevant and, therefore, not duplicated on the chart. Only price movements that exceed specified levels are recorded. This focus on price movement makes identifying support and resistance levels, bullish breakouts, and bearish breakdowns easier.
There are two methods for displaying the price scale along the y-axis: arithmetic and logarithmic. An arithmetic scale displays 10 points (or dollars) as the same vertical distance regardless of the price level. Each unit of measure is identical throughout the entire scale. If a stock advances from 10 to 80 over six months, the move from 10 to 20 will appear to be the same distance as the move from 70 to 80. Even though this move is the same in absolute terms, it is not the same in percentage terms.
A logarithmic or log scale measures price movements in percentage terms. An advance from 10 to 20 would represent an increase of 100%. An advance from 20 to 40 would also be 100%, as would an advance from 40 to 80. All three advances would appear as the same vertical distance on a log scale. Most charting programs refer to the log scale as a semi-log scale because the time axis is still displayed arithmetically.
The charts below illustrate the difference between arithmetic and logarithmic scaling.
On the log scale version, the distance between 20 and 40 is the same as the distance between 40 and 80. However, on the arithmetic scale, the distance between 40 and 80 is significantly greater than the distance between 20 and 40.
Key points on the benefits of arithmetic scale charts include:
Arithmetic scales are useful when the price range is confined within a relatively tight range.
Arithmetic scales are useful for short-term charts and trading. Price movements (particularly for stocks) are shown in absolute dollar terms and reflect movements dollar for dollar.
Key points on the benefits of log scale charts include:
Log scales are useful when the price has moved significantly, be it over a short or extended timeframe
Trend lines tend to match lows better on log scale charts.
Log scale charts are useful when gauging the percentage movements over a long period. Large movements are put into better perspective.
Stocks and many other securities are judged in relative terms through the use of ratios such as PE, Price/Revenues and Price/Book. With this in mind, it also makes sense to analyze price movements in percentage terms.
Even though many different charting techniques are available, one method is not necessarily better than the other. The data may be the same, but each method will provide its unique interpretation with benefits and drawbacks. A breakout on the point & figure chart may not occur in unison with a breakout in a candlestick chart. Signals that are available on candlestick charts may not appear on bar charts. How the security's price is displayed, be it a bar chart or candlestick chart, with an arithmetic scale or semi-log scale, is not the most important aspect. After all, the data is the same, and price action is price action. It is the analysis of the price action that separates successful technicians from not-so-successful technicians. The choice of which charting method to use will depend on personal preferences and trading or investing styles. Once you have chosen a particular charting methodology, it is probably best to stick with it and learn how to read the signals. Switching back and forth may confuse and undermine the focus of your analysis. The chart rarely causes faulty analysis. Before blaming your charting method for missing a signal, look at your analysis.
The keys to successful chart analysis are dedication, focus, and consistency:
Dedication. Learn the basics of chart analysis, apply your knowledge regularly, and continue your development.
Focus. Limit the number of charts, indicators, and methods you use. Learn how to use them and how to use them well.
Consistency. Maintain your charts on a regular basis and study them often (daily if possible).
