Stock Trading Charts
Stock Trading with Charts | Stock Trading Strategies | Stock Trading Methods
A chart is a graph of a stock's closing price against time and is the preferred tool of many experienced stock traders.
As we shall see, an enormous variety of market signals may be read from charts.
We will begin with the simplest and often most profitable interpretation of charts - trend following.
Trend followers buy stocks whose price is trending upwards. They sell stocks whose price is trending downwards (or whose price has stopped rising).
Trend following is in fact a momentum based trading strategy.
Postive momentum, shown in the uptrend on the right, occurs when buyers are content to push the price higher because they are satisfied that whatever price they pay today, the price will continue to rise.
Negative momentum, shown in the downtrend on the right, occurs when traders grow pessimistic about the prospects for the stock.
Traders believe they will get a lower price if they delay their sale.
They are keen to accept whatever price is on offer.
They are unlikely to delay a sale in the hope of getting a better price.
The overall effect of a number of traders acting in this way is to push the stock price lower.
Charting II shows how trends may be traded profitably.
The Trading Range
Stock prices can move sideways, in which case there is no trend. A stock exhibiting this behavior is said to be trading in a range or rangebound.
Stocks tend to become rangebound when there is uncertainty in the market about their prospects.
As we shall see, it is also possible to trade range-bound stocks profitably.
Whether we class a stock as trending or rangebound often depends on the timeframe we are looking at.
The chart on the right is rangebound when we look at all of the data.
If we were to consider only the data between days 7 and 17, there appears to be a strong uptrend.
Traders often specialize in trading particular timeframes. Daytraders, for example, buy and sell hour to hour and look for trends developing from minute to minute.
Long term traders may use weekly data in compiling charts and prefer to buy and sell infrequently.
Most stock traders prefer to trade stocks within timeframes that lie somewhere between these two extremes.
Charting III shows how ranges may be traded profitably.