Using A Line Chart
A Line Chart is used to plot the closing price of a stock over a specified time frame.
I don't know if it's just me, but lately (September, 2008) it seems that stocks are getting more and more volatile. (Update: Take a look at the chart above and you can see what I mean about the volatility. Notice the big price moves in the short time periods.)
Having a Line Chart to look at once in a while can help show a better perspective of a particular stocks price movement.
Some traders use this type of chart to eliminate the volatility for a specific time frame, which helps by taking an emotional aspect out of the chart. Mutual Funds also use these because they only re-price once at the end of the day.
Using this type of chart helps to take out some of the wild fluctuations that are seen in todays markets.
Lately (September, 2008) I have seen many stocks move within a 5-20% range or more during a single specific day. You may have seen them also, they're the one's that get us excited because "we could have made a lot of money if we were in on that trade".
Here is a chart of BAC just as above, except it is showing a 1 year time frame.
By using only the 3 month chart on the top of this page, you would think that BAC is doing great. Now looking at the 1 year chart you have a different perspective. Although it is up around 50% from its bottom in July 2008, it is still down around 40% from last year.
Using more than one chart to look at like this, is an example of looking at charts using multiple time frames to analyze a stock, which should be done before making a decision to buy or sell any stock.
A Line Chart would not be used by you much if you are Scalping or Day Trading, since a Line Chart only shows the closing price. An exception would be for selecting specific stocks to take a closer look at.
Scalping and Day Trading requires having the ability to analyze and watch a stocks movement during intraday time frames.
As with any type of chart, once you decide to use any particular one(s), it is best to learn as much as possible on that particular type to help give you the most benefit.
Once you become familiar with the different types of charts, you will need to learn about "Technical Indicators". Just below is the same Line Chart as previously, with the addition of several "Technical Indicators".
Take a look at the very bottom of the chart, this is where the key for the technical indicators being used on these particular charts are.
Above the key, you will see the dates the chart is showing. Just above the dates, the chart starts and is broken into sections. This particular chart has four sections.
- The very bottom section of all of these charts is the Volume of trades. This is being shown by green and red vertical bars.
- The second section up has a green line. This is showing an indicator called RSI, or Relative Strength Index.
- The third section has a green and red line, with shadows. This is showing the MACD, or Moving Average Convergence/Divergence.
- The remaining section, the main section at the top, shows the price plotted using the type of chart you specify.
Using Technical Indicators in you chart reading is called Technical Analysis. Learning how to use Technical Indicators with your charts will help you develop a specific trading plan based on the guidelines that you create.
There are many more indicators that can be included, such as Volume, Trend Lines, Bollinger Bands, Stochastics, etc. that I have left off only because of the wide selection available.