A picture speaks a thousand words, as the old maxim goes. This maxim holds just as true for charts.
Charting is the graphical expression of the behaviour of a stock over a period in time: Charts can be used to afford a birds eye view of the historical, often repeated behaviour or to get up close and personal with the current trading for you chosen time period.
The most basic charts are bar and line charts. If you are new to the trading game and not a Ph.D. in Statistics, these humble charts are the way to go. In fact, even if you are an experienced trader, bar and line charts probably still have a special place in your daily trading life. These charts are simply indispensable.
Stocks have four different trading points throughout a day. They are: opening price (O), closing price (C), absolute high price of the day (H) and the absolute low price of the day (L). All of these points appear on the charts.
The opening price (O) is the first trade of the day. Individual traders tend to place orders when the market opens, in reaction to the close of the previous day. This price will normally be based on emotional decisions and could well indicate how the first half or the whole day of trading is going to pan out. The closing price (C) is the last trade of the day. It is generally institutional investors that place orders towards the close of the day. Unlike the opening price, the closing price will normally be representative of decisions made by reason and research, not gut feel. The low (L) and the high (H) of the day are pretty self-explanatory. The difference between the high and low on the charts is referred to as the Range.
Purely looking at these five points on the charts will not be enough to plan future trades. You will also need to be mindful of how control and commitment has influenced the charts and then figure out what the trend is likely to be going forward.
Control
To trade, you need to have two parties: The buyer and the seller. If there are more buyers than sellers, it results in a demand greater than the supply. This imbalance will result in upward pressure on the price of stocks, which will persist until the imbalance is corrected. If there are more sellers than buyers, it means that the supply of the stocks is greater than the demand. This results on downward pressure on the share, which will remain until equilibrium is regained. Whoever exerts the pressure is said to have control. If you are doing short term trading, it is extra important to know how to spot a change in control when interpreting charts.
Commitment
The response of the market to the rise or fall in share price indicates commitment. As stocks are traded, we can discern something about the emotions of the traders. Those who continue to trade in spite of high prices, show that they believe in the future of the stock, the result is a high price for the day. This is bullish trading. The opposite is true for low trades. It tells us that sellers are worried about the future; therefore they continue selling their stock in spite of lower prices. This is bearish trading.
Conclusion
Charting is not a crystal ball. Charts do not foretell future market behaviours or predict stock prices. What charts do exceedingly well though, is offer you a concise and accurate history and patterns DO tend to repeat themselves. In the history lies a trend and it is from this trend that you may extrapolate data on which to base your projections of the probable future market behaviours and stock price changes. Therein is the greatest value of using charts.
