How to Understand Online Trading Graphs
For this article, we use a hypothetical security--XYZ stock. Information can be expressed in linear and candlestick representation. Price changes can be expressed in terms of numeric or percent changes. Simple moving averages (SMAs) help to identify price trends, but with inherent limitations depending on day range averaged. Bollinger Bands derive from SMAs and identify under or over-priced securities.
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Instructions
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Understand Line and Axis types
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Record the closing price for a series of time periods (usually days). Connecting the closing-price points forms the linear representation of chart value. For example, a security that closed at $3 on Day 1 and $4 on Day 2 would connect the points (1,3) and (2,4) on an x,y-graph symbolizing (x = days, y = price).
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Note the opening and closing price for the day--these form the length of a bar or "candle" in trading graphs. Often there will be lines sticking out from the top and bottom of the bar, forming the characteristic Japanese Candlestick. The y-values of the line endpoints are the highest and lowest price reached during that day. If the highest/lowest price is the same as the opening/closing prices, the cylindrical bar has no lines (candle wicks).
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Observe if the y-axis refers to percent or dollar values. Going with our example, starting at Day 1, stock XYZ registers a 0 percent on a percent-change graph since the identical price of $3 (or any price value) on Day 1 is obviously not going to change. At the end of Day 2, XYZ is worth $4 per share. On a y = price axis, the change would be by +1 (4-3), while on a percent change, it would be 1/starting price x 100 percent = 1/3 x 100 percent = 33 percent.
Indicators - SMAs and Bollinger Bands
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Calculate the average of closing prices for the last x trading days, where x is usually between 10 and 100. In conjunction with other chart indicators such a Bollinger Bands, simple moving averages (SMAs) can give substantial insight into future price movements.
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Designate a time period for the SMA. This can be tricky. A larger x gives a smoother value and more definite increase/decrease signals. This is good, but so many numbers may blunt a recent upswing or downswing that may yield big profits or losses in a short time. By contrast, a smaller x will capture such recent swings since the most recent day is a bigger portion in the overall average. The downside to a small number of days in the SMA is that fluctuations that do not indicate a consistent trend can give false signals about future stock price movement.
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Activate Bollinger Bands if the feature is available. You will be asked for a time period and standard deviation number. Stay with 10 days SMA and two standard deviations.
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Notice if XYZ price is "touching" an upper Bollinger Band; it means the security is overpriced judging by closing prices of the last 10 days. Price will likely come down within several days, if the past 10 days are indicative of a consistent trend. Similarly, an underpriced stock will be at or very close to the bottom Bollinger Band, indicating it is likely (but never certain) to rise within a few days.
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Tips & Warnings
Candlesticks: Coloring indicates direction of price fluctuation relative to previous day--typically green or white for a higher closing than opening price, red or black for a lower closing price than opening price.
Bollinger Bands: As with SMAs, more day-averaging gives more certain indication of a trend at the expense of overshadowing indicators of short-term price movements that can induce substantial gains or losses
While helpful in predicting security price trends, remember that there is an unpredictable element to trading. Indicators like the ones discussed above are guides, not guarantees.
Practice online with virtual money before investing real capital.
Basing decisions off trading charts and indicators as discussed here is part of technical analysis. Make sure you understand and appreciate the qualitative difference between technical and fundamental analysis for additional insight into interplay between a company and the value of its stock on the market.
