Friday, November 09, 2012

Stock Charts

Stock charts gained popularity in the late 19th Century from the writings of Charles H. Dow in the Wall Street Journal. His comments, later known as "Dow Theory". His theory says that markets move in all kinds of measurable trends and that these trends could be deciphered and predicted in the price movement seen on all charts.

A stock chart is a simple two-axis (x-y) plotted graph of price and time. Each individual equity, market and index listed on a public exchange has a chart that illustrates this movement of price over time. Individual data plots for charts can be made using the CLOSING price for each day. The plots are connected together in a single line, creating the graph. Also, a combination of the OPENING, CLOSING, HIGH and/or LOW prices for that market session can be used for the data plots. This second type of data is called a PRICE BAR. Individual price bars are then overlaid onto the graph, creating a dense visual display of stock movement.

Stock charts can be drawn in two different ways. An ARITHMETIC chart has equal vertical distances between each unit of price. A LOGARITHMIC chart is a percentage growth chart. It has equal vertical distances between the same percentages of price growth. For example, a price movement from 10 to 20 is a 100% move. A move from 20 to 40 is also a 100% move. For this reason, the vertical distance from 10 to 20 and the vertical distance from 20 to 40 will be identical on a logarithmic chart.

Stock chart analysis can be applied equally to individual stocks and major indices. Analysts use their technical research on index charts to decide whether the current market is a BULL MARKET or a BEAR MARKET. On individual charts, investors and traders can learn the same thing about their favorite companies.

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