Stock Market Charts and Technical Analysis

The stock chart is an important tool favored especially by short-term traders in the stock market for several reasons. The plot of the price fluctuations that have occurred in a stock or stock index, provides an easy method of monitoring a stock’s progress since any reference date in the past and as the stock’s graph line changes up to the present time, its possible future development can be estimated. And the developing chart patterns can often indicate entry and exit points at which to take a position in a stock under consideration.

The use of the stock chart in this way is usually referred to as Technical Analysis and is really just a method of trying to predict future price changes of a stock based on patterns of price movements in the past. Predictions for the future from examining the past are not always accurate but stock charts have proven their worth and few traders would wish to function without them.

The chart presents an at-a-glance picture of a substantial amount relevant related data and certainly many typical and repeated patterns of price movement are well known. The knowledge of how such patterns often evolve is the basis of the forecast for the movement that is likely to take place in the future.

Chart analysis is not a science
It is important to note there is no certainty that forecasts based on chart analysis or events of the past will materialize.

In addition to the value of charts of individual stocks or stock indexes as a tool for forecasting, there are several other basic related indicators for reference that are shown on most charts, among those are lines of resistance, lines of support, and trading volume of the specific stock.

Primary lines of resistance and support are often defined by lines showing a moving average of price changes of the stock for any of a selected period of hours, days, weeks, until the most recent closing price. Typically shown on charts are the 20-day, 50-day, and 200-day moving averages.

Such lines of reference provide an indication of the range in which a stock may be able to trend and their importance is often increased when the chart shows that a stock’s movement in price has taken it above a line of resistance or below a line of support, or conversely, when the chart shows that such breakouts are unable to be achieved.

Other reference points that can indicate levels of resistance and support are the previous levels at which resistance and support occurred, another instance of using history as a guide to the future. In addition to moving averages, a wide variety of other indicators and overlays can be shown on charts to provide additional support for interpretation. Lines that indicate the trend in which a stock or the market in general is trading and lines of moving averages are among the more basic and reliable indicators that are followed.

Many books are available on the subject of stock charts, technical analysis, and their associated indicators.

Author's Comments:

For more explanation and stock chart examples, please visit: Looking at the Charts and also How to Trade Stocks.