Basic Charting Patterns in Stocks

I don’t do a great deal with charting.  While there are some who search through charts for price patterns, I’ve found that charting is useful for telling you where you are, but not that useful for telling you where you are going.  Nevertheless, every investor should know the basics about charting, if for no other reason than to understand what other people are looking at and the predict their reactions. Today I wanted to go over some of the basics.  I’ll expand this thread as time goes on.

Here are some of the basic definitions:

Chart:  A chart is a graph of price over a period of time.  The most basic form of a chart is a line chart, which consists of a plot of the closing prices.  A more useful chart is a OHLC chart, which plots the Open, High, Low, and close for each day (or week or month).  This chart is more useful since it shows where a stock traded during the period, rather than just a point in time, which tells more of the story.  Candlestick charts, which as colored or open boxes depending on whether the stock moved up or down during the day, are another refinement.

time frame:  There are different time frames, which correspond to the length of time represented by each point on the chart.  For example, a chart that plotted a point each 15 minutes, and spanned a day, would be a very short-term chart.  A chart that plotted one point per day and extended a couple of months would be a short-term chart.  An intermediate-term chart would have points that represented a few days or so and cover several months.  Finally, a chart where each point was a week or a month, and covered a few years to a decade, would be a long-term chart.  I’m typically concerned with the long-term trends, so I look at charts of several months to a few years or a decade in length.

(Note, a great book that includes charting is Trader Vic: Methods of a Wall Street Master.  I would recommend picking up a copy if you are serious about technical investing.)

Trend:  A trend is the current movement of a stock.  A stock will always be in an uptrend, downtrend, or drawing lines.  We’ll cover these in a later post.

pattern (Bull or Bear): Certain patterns are commonly seen that foreshadow specific price movements.  One that would indicate the stock is ready to go up would be a “bull pattern”; one that indicated a decline in price a “bear pattern”.

floor or support level:  A price at which the stock traded at for a while before moving higher.  When the stock hits that price, it tends to not move below it.

ceiling:  The opposite of a floor.  Here the stock price is below the ceiling, and it may be difficult for the stock to get above the ceiling.

moving average:  An average in which the closing price for a specified number of days are added together and averaged.  Each day a new day is added and the earliest day in the average dropped.  Moving averages tend to smooth out the price of a stock and provide a clearer picture of what is happening.  Also, a stock above its average may be pricey, one below it inexpensive.  A 90-day moving average is a commonly used average.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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