Stock Chart Components
Many people don’t realize that without the invention of the ticker tape, charts as
we know them today would not be possible. The ticker tape was invented by Thomas
Edison in 1869 and forever changed the stock market. Instead of scribbles of stock
quotes on scraps of paper hand-carried via couriers around New York City, anyone
with access to a ticker tape could watch market activity anywhere in the country.
With the data from the markets recorded in such a reliable manner it was only
a matter of time before someone started recording those transactions in a graphical
form we now call stock charts. Although the format for charts has evolved and
changed over the years, the basic data used has not.
The 3 components of data available from the market are: PRICE, TIME, and
QUANTITY.
Although price is often considered the most important aspect of a chart, all
three pieces of data are critical to successful analysis in today’s Internet driven
markets.
Price is displayed on the chart in a variety of ways. In the illustration below,
price is shown in the form of candlesticks, currently the most popular price chart
form. Price is also displayed on the side bar and at the top of the chart to show the
open, high, low, and close for that particular time frame. The chart is called a “daily”
chart which means that each candle represents one entire day of price activity.
The difference or change in price up or down for that day is based on the prior day’s
close. So the last number at the top of the chart reflects a comparison between 2
days of market activity. To create this section of the chart, PRICE and TIME data
Price
Quantity
(Volume)
Time
CandleSticks
Open, High, Low, Close, Change
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Martha Stokes
have been used. TIME is an integral part of how we perceive and determine changes
in value (price) for a stock. PRICE is given priority status on the chart with TIME
close behind it. The importance of time is often overlooked by traders and investors.
TIME is displayed not only in formulation of end of day price difference, but
also at the bottom of the chart, and in conjunction with the open, high, low, and
close pricing as well. Charts combine PRICE and TIME to reflect the impact of
TIME on PRICE during the day, week, month, and intraday.
With this screen view, we have about six weeks of daily price action that can
be analyzed and studied. TIME allows us to see not only what is occurring at the
moment with price but also to see what has occurred in the immediate past, and
several months or years past. TIME provides the perspective on PRICE needed for
proper evaluation of the short term, intermediate term, and long term trend which
provides critical information about where price has been and where it is going.
QUANTITY is the final piece of data that is essential for chart analysis.
QUANTITY appears as both a graphical histogram called the ‘volume indicator’,
and the total quantity of shares traded each day.
The QUANTITY indicator VO LUME provides a visual image of shares
traded over TIME. By studying the quantity of shares traded in relation to price
fluctuations, a good chartist can quickly pick out discrepancies, fading volume
patterns, exhaustion volume patterns, and speculative volume patterns that
can forewarn of changes to price before price actually begins that change. The
importance of QUANTITY can’t be overstated.
QUANTITY is not just the number of shares per, minute, day, week, or month
it also is the share lot size being traded for every transaction. Share Lot Size
provides a higher level of analysis seldom used by small retail traders. With the
dominance of the institutions in the marketplace, being able to see visually what the
large lots are buying or selling has become increasingly important.
It is the relationship between PRICE, TIME, and QUANTITY that creates
the patterns on charts that expose the direction of trend, and the strength and
energy behind the trend.
