If you’re new to the stock market, wondering which chart to use can feel like trying to put a square peg in a round hole. Even if you’re familiar with stocks, it never hurts to brush up on your chart reading skills.
A stock chart is simply a graph of price history for a company, over a set period of time. The data can be displayed in different ways.
Each type of chart gives you different information. The kind of chart you use really depends on what you’re trying to find out about a stock.
So what type of charts are there?
On any website that shows stock charts, you’ll usually see four different options. Those options are bar (OHLC), line, mountain, and candle.
Before we discuss which one you should use, let’s first take a quick look at what each type looks like.
This is the most basic a stock chart will be. Line charts are created by looking at only the closing price of a stock over a set period of time. The closing price is where the stock is when the trading day is over, at 4 pm eastern time in the U.S.
Take a look at the line chart of US Steel – X below.
It’s pretty much ‘connect the dots’, but for stocks. You can use line charts for any time frame you’d like. However, I only find them useful if I’m looking at a stock over a year or longer period.
Why is that you ask?
First, let me show you a 10-day line chart of US Steel – X. The one above is a six-month chart.
From this 10 day view of the stock, we see that it’s been trading in a range of about $32 to $35. The stock price is the numbers on the far right. When I look at a chart that only shows a few days of price movement, I always want to know as much detail as possible.
The trouble is, this chart doesn’t give you that much info.
This line chart shows a sharp $2 price increase on day three. Afterward, you see a slow decline back towards the $32 mark. The last two days on the chart (seen as the last two lines on the right) show another price move of over $1 taking place. I still don’t know all the price movement of this stock, though.
We’ll come back to this chart again in a moment. Once we go over the other chart types it’ll start to make sense which one to use in a given situation.
When you watch almost any show on CNBC, they typically use a mountain chart for stocks. Here’s Jim Cramer talking about Paychex – PAYX on Mad Money. And of course, he’s using a mountain chart.
Jim Cramer on CNBC’s Mad Money
Didn’t get a good look? Here’s a 12-month chart for Paychex below.
Mountain charts, also known as area charts, are just a line chart with the space under it shaded in. It still uses the closing price for each day to draw the ‘line’. It doesn’t provide any other price data.
If you compare a line chart with a mountain chart they will look exactly the same.
Bar Chart (OHLC)
Years ago when I first started learning about stocks, I used to think that line charts were the only thing that existed. It sounds kind of silly now looking back at it.
Whenever you learn something new, you don’t know…what you don’t know.
When I realized that the price of stocks actually changed throughout the day, I felt like I discovered a whole new world.
And bar charts or OHLC, where the ones that did it.
Bar charts show price movement by the use of three bars. Think of it as a tree with only two branches. Here’s an example below.
This is actually two days of price movement. The green bar on the left is one day and the red bar is the day after.
So how do you read this type of chart?
Remember I told you to think of it as a tree with two branches? The ‘branch’ on the left side is always the price the stock opened at that day. On the right side is the stock’s closing price.
If the left and right bars are the branches, that would make the vertical line the ‘trunk’. The trunk or vertical bar shows you the day’s entire price range of the stock.
In the above example, there is a green and a red bar. The green bar indicates that the stock closed higher than it’s opening price. A red bar means it closed lower than it’s opening price.
What if the bars didn’t have any color?
You may have noticed above I called these OHLC charts. It simply stands for Open, High, Low and Close. Pretty straight forward.
Even if the all the bars were the same color, you’d still be able to tell if it was an up or down day for the stock. The quickest way is to just look at the two side bars or ‘branches’.
By comparing the two, you instantly know if the day ended up or down.
Now we get to the ‘HL’ of the OHLC chart. The vertical bar tells you the high and low of the day. All you do is check the top of the bar to see the high and the bottom to see the low.
Going from right to left, you get a picture of an entire trading day for a stock. The Open price is the left bar, the High is the top of the vertical bar, the bottom is the day’s low and the right bar is the closing price.
Can some of these be the same?
Absolutely. Here’s an example.
By looking at the color you can tell the first day was a down day. But not by much. At first glance, it looks like it opened and closed at the same price.
If you looked at this stock with a line chart, you’d only see the end of day price. You’d have no idea that the stock fluctuated so much during the day.
Sometimes the open or close is equal to the high or low of the day.
This bar shows a stock closing at it’s high. It’s important to note that it doesn’t necessarily mean the high happened at the end of the trading day. Just that the stock ended the day at it’s highest price.
Which brings us to the most used type of stock charts.
There’s a ton of info out there about candlestick charts. Just do a quick Google search and you get results about websites, books and everything else. If you’ve ever studied or used a candlestick chart, you know why there’s so much stuff out there.
But before we go any further, take a look at this candlestick chart of Schlumberger – SLB.
At first glance, you’ll see it looks similar to the bar chart (OHLC) we discussed earlier. It still tells you the open and close, as well as the high and low of the day.
So how do you read a candlestick chart?
The colored area is the ‘candle’. They show the opening and closing prices of the day.
The lines at the top and bottom of the candle are known as ‘shadows’. Shadows, if they are present, tell the day’s highest or lowest price. Keep in mind that any chart; candlestick, bar, mountain or line, can represent any time frame you choose. It can be minutes, hours, days weeks…you get the idea.
It’s interesting to note that these two candles look identical, except for their color. A green or white candle means that the day (or any period) ended higher than it opened. Red or black candles, mean the session ended lower than the open.
Green candles without a lower shadow mean the opening price was also the lowest price of the day.
If the green candle has no upper shadow, then the closing price was also the day’s high.
It’s the same for red candles, except in reverse. A red candlestick without a lower shadow means it closed at the low of the day. Here’s an example.
I’m sure you see where this is going. And lastly, a red candle without an upper shadow means the stock opened at the high of the day and just went lower.
Remember the chart of US Steel we looked at earlier? Here’s the stock viewed on each of the four different charts we discussed. First the bar chart.
Next is the mountain chart.
Another look at the candlestick chart.
We can’t forget about the line chart we first looked at. Here it is one more time.
Are you still wondering which chart you should use? If you’re really looking to get the most information from a chart, then I suggest either a bar or candlestick chart.
They both present the stock prices in similar ways. It really comes down to what’s easiest and what you prefer.
I pretty much use candlestick charts exclusively. I’ll admit, it did take me awhile to get used to reading them when I first started. Now it’s like tying my shoes or riding a bike.
What type of chart do you normally use? Do you only use daily or weekly charts? Let me know in the comments below.
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