What Are Stock Charts And Why You Need To Use It

If you are not using stock charts then you are essentially missing out on the simplest and easiest way to analyze the stock market. Even seasoned professional and old timers use stock charts to form an opinion and to enter and exit stocks.

Stock charts are like what X-rays, MRI are to doctors. They help us to determine the health of a stock.

A picture is worth a thousand words. A stock charts is worth a thousand dollars and even more. There are basically a few ingredients in a stock chart. They are:

  • Price
  • Volume
  • Indicators

Below is the daily chart of the S&P 500 SPDRs etf.

To the layperson, the above chart means nothing but to a seasoned trader or investor this stock chart of SPY tells us:

  1. The general stock market is in a healthy bullish market
  2. Short term, the market is healthy
  3. Mid term, the market is healthy
  4. Long term, the market is healthy
  5. Therefore our focus is to buy the dips or breakouts and not be afraid to hold stocks for the long term.

How do the professionals know all the above? Through years of experience and analysis which you will also learn in the upcoming chapters.

In the chart above, you have price and volume and also 3 indicators which are the 20 day, 50 day and 200 day moving average. Using these 5 piece of information, the seasoned investor can dissect the market and know what is the appropriate action to take.

Technical Analysis Vs Fundamental Analysis

Using charts to analyze the markets are often referred to as technical analysis. On the other hand, looking at the balance sheets and ratios of a company is often referred to as fundamental analysis.

Which one is better?

There are lots of debate out there but in our opinion it does not matter as long as the method takes you to your destination which is making money in the stock market. It's just like someone debating whether a Boeing Aeroplane or Airbus is better.

In the grand scheme of things, it does not matter! Both type of airplanes have been successfully used to transport people all over the world. As long as the method does the job, then it is good.

Combining Technical Analysis & Fundamental Analysis

Having said that, there are lots of professionals that combine both type of analysis to make money in the markets. Even if they do not master them, they at least have a passing knowledge of the other discipline.

Here in Dstockmarket, our emphasis is on technical analysis because we know that price and volume tells us all we need to know about the actions of market participants. And from there we can plan our actions.

Charts Come In Different Forms

Stock charts come in different forms and color. The usual type of charts are:

  • Japanese Candlestick charts
  • Bar charts
  • Open High Low Close (OHLC) charts
  • Point and figure charts

There are many more out there but these are the popular ones. Below is the same chart of SPY using the OHLC type of chart. You can see that it is in a different color as well. It does not matter as long as it helps the trader to analyze stocks. All of these are just a matter of preference.

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