Stock charts and graphs come in many different shapes and sizes. They are essentially utilized by day traders to help them determine the opportune moment to buy (or sell) a stock. The importance of these charts and graphs is huge in understanding both stocks and the concept of paper trading, where investors would write their investments on paper and follow the market movements.
Learning how to read these stock graphs and charts is especially important in the current pandemic stock market environment as extreme volatility can quickly lead to news-driven massive swings in the stock market. It is, therefore, important to only rely on fact-based stock charts & graphs to understand and time the meaningful changes in market trends for profitable transactions.
A thorough understanding of the stock charts and graphs also help the traders in navigating the pattern day trader rule (PDT), which is otherwise one of the most common grievances, especially amongst new traders.
If you’ve been looking to understand stocks a little better, here is your comprehensive reference guide to the many different types of charts and graphs available along with an overview of their potential uses.
1. Line Charts
Line charts are one of the most popular types of charts used in stock reports to give a comprehensive view of the historical and current trajectory of stocks.
Made up of a single line from left to right, line charts connect the closing prices of the stocks (or any other specified price data point) at a specified time interval. The main objective of a line chart is to give a bird’s eye view of the historical prices of the stocks in a single line.
By drawing trend lines to connect the peaks and lows in line charts, you can anticipate both potential price inflection and breakpoints in stock trading.
Benefits of Line Charts
- Offers a very simple view of the stock price movement
- Helpful to use when you’re comparing the performance of many stocks on the same chart
2. Bar Charts
Also known as open-high-low-close (OHLC) charts, bar charts use vertical lines extending to the highest and lowest prices of stocks for the specified period along with a short horizontal line extending to both left and right to indicate the opening and closing price respectively. The color-coding of the bar charts is based on the net gain (green) or loss (red) on the stock closing price.
Benefits of Bar Charts
- Offers relative information to understand stocks by showing the range (high/low) of the days trading
- Leverages the length of the bar to reflect volatility or the strength of the trend
3. Candlestick Charts
Originated in Japan in the 1700s to mainly track the price action of rice futures, Japanese candlesticks were later introduced to other countries. One of the most popular charts used by stock traders, the candlestick chart is considered standard on almost all platforms.