Paper-Trader Charting

Learn about stock market technical analysis

To learn about stock market technical analysis let's first look at some price charts and understand how to read them.

The simplest of the price charts is the Closing Price Chart. It simply shows the closing price of the stock for the period selected. The blue continue lines on the stock chart below shows the closing price for this stock. This is an 18 month, weekly chart which means that each point on the chart represent 1 week and the horizontal axis goes from the current date on the right (24 Jan 2007) back 18 months.

The weekly closing price is then the price at the close of trade on the last day of the week.

 

The next chart shows the OHLC (Open High Low Close) type. However in this case instead of just show the closing price, it also shows the opening price (the price that the stock opened in the period), the high (the highest price the stock reached during the period) and low (the lowest point the stock reached during the period.

In the chart below we are again looking at an 18 month, weekly chart with each tick representing one week.

If we blow up a section of this chart we can see the ticks clearer. Here we can see that each period, one week in our example, is represented by a single vertical line with two small lines one on the left and one on the right.

The top of the line indicates the high of the period and the bottom represents the low of the period.

The small line on the left side represents the opening price and the right side the closing price. If the stock had a "UP" period then the line is blue indicating that the closing price was HIGHER than the opening price. If the stock has a "DOWN" period then it shows as a red line indicating that the closing price was lower than the opening price.

 

The third style of chart is called a Candlestick. It too shows the open, high, low and closed, but it shows them in a different way.

Let's look at the chart below.

Again the Blue and the Red bars indicate an "UP" period and a "DOWN" period respectively.

If we look at a detailed section, the top and bottom represent the high and low for the period as in the OHLC chart. However the opening price is indicated by the top of the rectangular area and the closing price by the bottom of the rectangular area.

Experienced investors tend to like candles because it gives a more descriptive picture of what's going on.

 

 

 

Along the bottom of each chart we see the volume traded for the period. Again a blue bar indicate an "UP" day and a rend bar a "DOWN" day.

By studying the combination of stock price movement on the chart, with the volume gives us our first insight into picking our entry and exit points.

For example, if there a large price increase day on the price chart, but the volume is very low, this might indicate that the price increase is not sustainable. This is because the price movement was the result of a small number of investors trading and if the demand is not sustained then the price will likely fall again.

We can add other indicators to or chart to give us some additional signals of what may happen to our stock.

Here we've added the RSI indicator and the MACD indicator. If we look at a detailed view of this we can see the indicators.

The RSI stand for Relative Strength Indicator. It compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100.

The RSI is the blue line and on the chart the top dotted line represents 70 and the bottom line represents 30.

If the RSI is above 70 it's said to be overbought and is a signal that the stock has had a lot of buying. If it goes even higher then it may be an indication that the stock price may fall in the future as demand for the stock cannot be maintained.

Conversely if the RSI falls below 30 it may be a sign that the stock price is approaching a bottom and may begin to turn up.

We see on our example the RSI is currently in the middle range of about 55.

The other two lines on this chart, the red and green ones, are the MACD. The green line is the MACD itself and the red line is the average used for the comparison. This time our scale is not the dotted lines used for RSI but rather the numbers on the axis ranging from -8.80 to +8.80.

If MACD is a positive number and rising, then this this would be considered bullish. If MACD is a negative number and declining then this is a bearish signal.

It is also significant if the MACD is above or below the comparison average (the red line) and the cross over point are also significant. 

If you're interested in some more information on MACD or any of the other indicators, contact the Support Center.