Learn The Basics Of Charting

Learn the Basics of Charting

Charting is one of the most important, yet basic, components towards building a successful trading system. Before we get into the hardcore details of charting, let’s begin by first understand what charts are, what they show, and how they are built.

Does this chart look somewhat familiar to you?

Any cricket enthusiast would immediately know that this is a simple “chart” that shows the number of runs two teams (in this case, India and New Zealand) have scored throughout the match. By simply looking at it, we can see that India has scored more runs than New Zealand. What else does the chart show us? It shows us the number of overs that have been played (the horizontal access), as well as the number of runs each team has scored in total (the vertical accces).

What else? Can we quickly, by observing this chart, pick up on some quick useful information? Of course we can! We can see the number of runs scored each over by each team. Isn't that amazing? We can also see which team has more "momentum". For example, between overs 4 and 9, New Zealand was ahead of India. But lo and behold, India had a massive 9th over to overtake New Zealand.

This type of chart is called a Line Chart. It's actually the most basic of chart types. For each point on the chart, a line chart only allows for a single data point.

Now, let's shift away from cricket and move to the stock markets.

At first glance, the chart doesn't look much different than the cricket example chart right? And yet, this is a line chart of Infosys (NS:INFY) Technologies, one of the largest IT firms in the world based right out of India. It simply plots the closing price of each day from 2nd February through 9th February. Pretty neat, right?

But is it enough? What if I wanted to see more information? What if I wanted to know such basic information such as the low, high, open, and closing prices of Infosys for each of those days? Well, my friend, that's exactly what a OHLC chart shows!

There is a type of chart that is able to easily show these extra data point to you without overwhelming you. It clearly shows the open, high, low and close for each time period of the chart. This is called a Bar Chart.

Here's what it would look like for Infosys during the same time period.

So on 2nd February, we can easily see the open, high, low and closing prices of Infosys. Isn't that a lot more useful? If we wanted to, say, understand what happened between the 2nd and the 3rd, we can do it! We can see that Infosys opened up higher on the 3rd. The chart also shows something critical that all chartists look at - volatility. Notice how on the 4th of February, the vertical line is much longer than on the 2nd? This signals that the stock moved up and down quite a bit that day.

Well, that's it for now! Watch the video to learn a bit more on introduction to charts, and feel free to ask comments!

Watch the video below to learn more about a basic introduction to charts!

Originally posted on TradeAcademy