What are Stock Charts?
Cricket – The sport that unifies the country. It doesn’t matter what you are doing, if there is an important cricket match is going on right now, you will stop and find the nearest television. And while watching a cricket match, you probably have seen a graph similar to this.
It’s such an easy to understand this graph. It’s simple. As the match progresses it shows how many runs a team has been accumulated. And what a chart does in essence is take a lot of data and plot it visually. It’s easier to process that way. Traders use a similar kind of a chart and they call it a Line chart.
Now think about Infosys, for example. It moves up during the day, market opens up in the morning and close at say 3.30pm. Now the close is the last point of data for Infosys for that day. A line chart such as this of Infosys plots the close from February 2nd to February 9th.
Each day has the data point i.e the close. The horizontal access is the date and vertical access is the price. Let’s go back to the line chart we see during cricket matches. What if we wanted to know more information about each over? Say the number of runs scored during each over. How do you do that? You are using a line chart, so you really can’t. For each point on the horizontal axis, the line chart only allows a single data point.
Similarly, traders need more information about a particular day. Now in the Infosys example, we were plotting the close of the data that is the last price of that particular day. The line chart is the most basic, however the traders need little more information like what was the highest point that day, what was the lowest point of that day, what was the open does the first point as soon as the market opened of Infosys and finally what was the close. This is actually really popular and it is called the OHLC.
This is called the Bar chart. So for February 2nd, the points you can see, that is the high and the low, the horizontal line on the right shows the close and the horizontal line on the left shows the open.
In this case, the close of Infosys is much lower than the open. Hence we can see in just a glimpse that it was bearish day; Infosys fell on 2nd of February. But let’s admit it, the bar chart is still very dry, it gives us all the required information but if you are seeing it for the first time, it was difficult to see if it was a bullish day or a bearish day and that’s where candle sticks coming.
Here is the candle sticks chart,
Candle sticks are vastly improved version of line charts. A green candle stick signifies the closing price was higher than the opening. And a red candle stick is the opposite; the closing price was lower than the opening. Basically if you see a green candle stick, that day was a bullish day. And if you see a red candle stick, that day was a bearish day. This is exactly the same as the bar chart except you just have colored bodies. You have high, open, close and low on exactly the same areas. This makes it tremendously easier to spot trends.
For example from February 3rd to 9th , we had five straight bullish days.
Isn’t it easier to see? You can also gather lot much useful information, for example you can gage volatility very easily.
Let’s compare the 3rd of February with 9th February. Now both candles are green which means that on both days Infosys went up in price.
Now notice that on 3rd there is hardly any activity, the body is tiny which signals that there is hardly any difference in the open and the close. Furthermore, the upper and lower shadows are miniscule in size. This shows that there was not much price movement during the day. The 9th, however, was an interesting day. We can gather that not only did Infosys close 40 points higher than its open, but it also reached a high of 2300. Perhaps 2300 was a point of resistance. We will get into specifics of what resistances are, supports are and how to trade them and even specific indicators but the key take away over here is that the candle sticks provides you a simple, visually appealing way to present a lot of price data.
The chart we just saw of Infosys was a daily chart. Now it means that you are representing information for one full day; it was the high of that particular day, the low of that day, the close of that day and the open of the day. But those were only 8 days.
Can we see more? Sure.
Here are the daily charts of Infosys for 1 month, 2 months, and all the way up to one full year.
Notice that the charts aren’t so easy on the eyes. Identifying a string of consecutive green candles for example. It’s a challenge and how do you change that; well by changing the time frame. You see you have one year of data here and each bar is a full day. What if we change that? We can plot a weekly chart, the concept is exactly the same except that each bar now represents the entire week instead of the day.
So when you see the bar here, you see the open of that week, the close of that week, the high of that week and the low of that week.
Choosing a time frame is going to be the most important decision you take as a trader. You see when you have a system; you can easily apply that system to all time frames. Let’s say you have applied that to the 5 minute charts, you have multiple trades during the day which means you will have to sit in front of your computer during the day. But if you selected say a higher time frame, the daily or weekly chart, you will get only a few trades a week. And if you are a long term investor and you picked the monthly charts, you will get a few trades a year. Generally speaking probability increases of success when you choose a higher time frame like the daily, weekly, monthly charts.
This course is going to focus on the daily and the weekly charts for investing. Now that you understand candle sticks, let’s see Infosys little more closely and see what trends formed over an entire year in the weekly charts.
This is the weekly chart of Infosys,
Notice that the downtrend that developed from March through June. Also notice that downtrends always have lower consecutive peaks.
The trend then turned upward from July. Notices that uptrend have high consecutive troughs.
If you pay close attention, you will notice that the only match is Infosys fell massively on one day. That date was March 13th; it’s the date the company management stated that it expected lower than expected revenues for the financial quarter. Now this is a bad news. What you think traders and investors did? They started to sell the stock and then around 11th of June, Infosys management released the revenue figure. Now although the revenue was not that great, there were better than the management had projected. Traders naturally began accumulating; Infosys stuck. This in turn began the uptrend. Now isn’t it beautiful? All relevant information on price will reflect right there, all we need to do is to react to it. It does not matter why something happens. If traders or investors feel it’s important to dump a stock or accumulate it, all we need to do is, to follow those footprints in the sand and make our trade.
Now let’s see few more examples of uptrends and downtrends for one year using the weekly charts.
You notice that it has higher consecutive troughs. This is obviously an uptrend; it’s also a fundamentally strong stock. It’s one years of data and that’s the weekly chart.
The next one is Yes bank
It’s an entire year of data weekly chart just like Colgate Palmolive. Its only an uptrend, it has higher consecutive troughs.
Now look at some downtrends
Gitanjali is in downtrend, it has been falling since July and we have consecutive higher peaks.
The next example
It is also in a downtrend and you can also see it has lower consecutive peaks as well.
In this lesson, we spoke about charting starting from line charts, bar charts and candle sticks. You have also heard me saying peaks and troughs so many times and I know you know what uptrend and downtrend is. But the question is this, in that Infosys can you short when market plummeted and can you go long or buy shares when Infosys started to go up in June July. The answer is yes! But before we get into that system, we have to define what a peak trough is.
In next lesson that is exactly what we are going t do, it’s part of a trend.