Stock Charts and Its Importance

You might have seen traders, at least in news or videos, with their eyes fixed on a graph on their computer screens. If you’ve seen them closely enough, you might have also witnessed how the graph moves every second. These graphs are nothing but stock or price charts.If you are new to the world of stock market, irrespective of whether you are a long-term investor or interested in intraday or swing trading, these charts will be the most vital element of your investment journey. While there are several things that you need to learn as a beginner, starting your investment journey by understanding these charts is a wise decision.After all, charts are the place where technical analysis begins and ends. Even if you are more interested in value investing and prefer fundamental analysis, you still cannot entirely ignore the technicals. So, what are these charts? How can you read them correctly to make an investment or trading decision? Take a look-

To keep things brief, charts are nothing but a graphical representation of the price movements of any stock over a particular time frame. Like any other type of charts, these charts also feature two axis- horizontal (x-axis) and vertical (y-axis). The horizontal or x-axis represents the time period, and the vertical or y-axis represents a price.You can view price charts of all the stocks listed on a stock exchange. Apart from stocks, you can also view charts of indices, currencies, and commodities. Moreover, there are many different types of charts that can be used for technical analysis. Some of the most common examples are the line chart, candlestick chart, and bar chart.It is up to the investors and traders to select one that best helps them find hidden patterns or trends in the chart.

Apart from the graph itself, there are other vital elements on a chart. They are-

• Open- This is the price at which the stock opens on a particular trading day.
• High- This is the highest price the stock reached on the trading day.
• Low- This is the lowest price the stock was traded at on the trading day.
• Close- The price at which the stock traded before the market closed.

• Stock Symbol/Ticker Every stock listed on an exchange has a symbol. This is also known as Ticker. For instance, the symbol of Tata Consumer Services Limited is TCS on the Indian indices. You might have already seen the stock ticker at the bottom of the screen on news channels with symbols of stocks along with their price movements in green or red.
• Price Movement With regard to the price movement, there are four things you should know. If you are using a daily chart, they are-
• The price movement is generally displayed in green if the price has moved upward. The same is displayed in red when the price falls.
• Last Change The last change displays the most recent positive or negative movement in the price for the selected duration. For instance, if you see that the price of a particular stock is 101.20 (+1.20), the amount mentioned in the bracket is the last change. If you are looking at a daily chart, this will mean that the stock is trading Rs. 1.20 higher than yesterday’s price.
• Volume Another very critical aspect of technical analysis is volume. It represents the total number of shares that have been traded (bought or sold) within the selected timeframe. If the volume is higher, it suggests that more investors and traders are interested in buying or selling the stock at the current price.
• Chart Duration You can view price charts for different timeframes. Most trading platforms now allow you to view charts in timeframes ranging from 1 minute to 1 month. For instance, if you are viewing a chart in a 1-minute timeframe, every point on the chart will represent the price movement of a stock in 1 minute.

One of the simplest ways to analyse a stock technically is to identify its trend through the chart. In simple words, if the price of a stock is consistently moving higher within a particular timeframe, it can be said that the stock is in an uptrend. If the price is consistently falling, it can be assumed that the stock is in a downtrend.Long-term investors generally try to identify such trends on bigger timeframes such as 1 day, 1 week, or 1 month. Intraday traders, on the other hand, trade on smaller timeframes such as 1 minute, 5 minutes, 15 minutes, and 1 hour.But as it can often be challenging to identify trends, investors and traders use technical indicators such as trend lines, moving averages, and relative strength index.

It can be difficult to identify trends and patterns in the price movement of a stock without considerable experience and knowledge. At times, even the most experienced investors and traders are unable to make a confident decision.This is where technical indicators get into the picture. Without sounding too technical, the indicators are mathematical calculations based on a particular formula. They are generally plotted as lines or patterns on the price chart to make it easier for the users to identify signals based on which they can make the buying/selling decision.While there are several different indicators, they can all be divided into two categories- lagging and leading. A lagging indicator considers the past trend of the stock for indicating momentum. Leading indicators try to predict future movements in the price of a stock. Most trading platforms in India now allow you to use these indicators on their charts.

Investors and traders generally use a combination of indicators and patterns. The patterns can be defined as a distinct formation on the chart due to price movements. For instance, a flag pattern is one of the most commonly used breakout and trend reversal patterns. If this formation is created on the chart of any stock, you will see a figure that resembles a flag.In fact, the trendlines are also a type of pattern as you will see a distinct formation due to the price of the stock moving in a particular direction for a considerable duration. There are other patterns such as cup and handle, ascending/descending triangle, double bottom, double top, symmetrical triangle, and head and shoulders that are commonly used by market participants.

If you are new to the stock market and interested in understanding how to read a stock chart correctly, moving averages deserve your attention. It is a type of technical indicator which is used by retail as well as institutional investors. The indicator smooths out the price movement by continually updating the average price of the stock.The indicator considers a fixed timeframe for which it plots the average price of a stock. For instance, 30-days and 50-days moving average are very commonly used.Many investors and traders buy or sell stocks when the price of the stock breaks the moving average. A sell signal is generated when the price falls and breaks the moving average. Similarly, a buy signal is generated when the price of a stock rises and breaks the moving average.But remember that these are just tactics that market participants generally use to predict the price movement of a stock. It is not mandatory that a stock price will continue falling if it breaks the moving average from the top or continues rising if the moving average is broken from below.

While the internet is full of anything and everything,you’d like to learn about the stock market, remember that trading is all about gaining experiential knowledge. Only when you apply the things you learn in live markets will you grow as an investor or trader.If you are new to the stock market, start small, and only use more capital after gaining some experience. Continue learning and experimenting as it will take some time for you to find the things that work for you. Every trader is different, and it is not necessary that something that is working for others might work for you as well.Rather than expecting the market to reward you with loads of profits within a short span of time, focus on your skills and knowledge to grow consistently. Do note the points discussed in this post as they will make it easier for you to understand charts and begin your stock market journey on the right note.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.