Charting 101
Securities Trader Group
Presented by: Craig Schwenn
Disclaimer
This webinar/meetup is for educational purposes only. All
examples and analysis are intended for these purposes and
should not be considered as specific investment or trading
advice. All hypothetical examples are for the purposes of
teaching principles and are not intended to suggest future
results. The risk of loss in trading securities can be substantial.
Traders must consider all relevant risk factors including their
own personal financial situation before trading.
Overview
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Technical Analysis
Components of a Price Chart
Support & Resistance
Common Indicators
Charting Software for Stocks
Technical
Analysis
Technical Analysis (TA)
• Forecasting future price movement based on the analysis of
past price movement
• Differs from Fundamental Analysis as traders are not
concerned with company’s financial reports
• Traders use a variety of charts and indicators in comparison
to price to determine direction
• Traders often develop rule-based trading styles
The Trend
• Refers to the general direction of a stock’s price
• Many traders like to trade in the direction of the trend
• Three (3) types of trends
– Up
– Down
– Sideways
• Three (3) phases
– Accumulation
– General Participation
– Distribution
• Price Charts are used to identify these trends
Price
Charts
What is a Price Chart?
• Shows the movement of price of a financial instrument over
a selected period of time
• Time is shown on the X-axis and price is shown on the Yaxis
• Cornerstone for Technical Analysis
• Used to recognize
– Trends
– Chart & Candlestick patterns
– Support & Resistance
Sample Chart – SPY (ETF)
Chart Types
• Chart type is determined by how the price is plotted
• Types
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Line Chart
Bar Chart
Candlestick Chart
Point and Figure Chart
Many Others
Line Chart
• Most basic chart type
• Only plots closing price of financial instrument for specified
time frame which are connected by a line
Bar Chart
• Chart is created by a several vertical lines representing
each plotted time interval
• Visually provides more data regarding the stock’s price for
the time interval
• The OHLC Bar
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Open
High
Low
Close
Bar Chart
Candlestick Chart
• Similar to bar chart
• Shows the stock’s open, high, low, and close values for the
time period
Candlestick Chart
Point and Figure (P&F) Chart
• Consist of columns of X’s and O’s
– X’s represent rising prices
– O’s represent falling prices
• Time is NOT a factor in creating a P&F chart
• Used to filter out “noise” in stock movement and to easily
find support and resistance
• See StockCharts.com for more information
Point and Figure chart
Support
&
Resistance
Definition
• Support & Resistance are areas on a price chart where
supply and demand meet
– Supply = Selling = Resistance
– Demand = Buying = Support
• Support: Price point where there is more buying pressure
than selling pressure which drives prices up (bullish)
• Resistance: Price point where there is more selling
pressure than buying pressure which drives prices down
(bearish)
• Support = Resistance
Finding Support and Resistance
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Highs and Lows
Trend Lines
Moving Averages
Gaps
Other Options
– Even Price Points
– Indicators
Highs and Lows
• S&R is established by connecting common highs or lows
with horizontal lines
• A S&R line becomes stronger as more price points hit and
fail to break the line
• Stock Price has a long memory
• All time highs and all time lows represent strong resistance
• Previous highs or lows can become a short term resistance
• Often will not get a perfect S&R line – Create S&R Zones
How to Draw Lines
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Get as much data on the chart (monthly time frame)
Change chart type to Line Chart
Mark all time highs and all time lows
Create lines where two (2) or more price points will touch
line
Switch chart type to candlestick chart and adjust if
appropriate
Switch to weekly chart to see if there are any new shared
Highs or Low
Repeat for daily chart
Once done, update only when price exhibits new H/L
Trend Lines
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Connect price in a rising (bull) or falling (bear) trend
Usually connects the low price points in a rising trend
Usually connects to the high price points in a falling trend
Can draw the opposite to these rules if price is showing
strong pattern (see SPY)
• The more points touching the line, the strong the trend line
and thus support or resistance
• Drawing trend lines can help traders see chart patterns
Moving Averages (MA)
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Show the average stock price over specified time interval
Drawn for you by most charting software
One of the most commonly used indicators
Common Short Term moving averages ( < 50 ) are 10, 20,
or 30
• Common Long Term moving averages are 50, 100, and 200
• Long Term MAs provide stronger support & resistance, but
often introduce more severe volatility when broken
Gaps
• An area on the chart where there were no trades during
regular market hours
• Typically is created when the opening price is higher (or
lower) than the previous day’s close
• There are different types of gaps
• The wicks of the two candles represent support and
resistance
Other Options for S&R
• Even Price Points
• Indicators
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Volume at Price
Pivot Points
Bollinger Bands
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Common
Indicators
Volume
• Number of shares bought and sold within a given time
period
• Often overlooked by many traders
• Supports or denies the price action by measuring the
commitment behind the move
• Volume spike can indicate a possible
– Break through of support or resistance
– Reversal in an established trend
Moving Averages
• Moving Averages smooth a stock’s closing price over a
given period
• Help define current direction of a stock
• Two common types of moving averages
– Simple Moving Average (SMA)
– Exponential Moving Average (EMA)
• Considered a lagging indicator
• Adjust time period of moving average according to trading
style
• Some traders use the cross over point from different MA
periods to enter & exit trades
Moving Average Convergence-Divergence
(MACD)
• Calculated by subtracting a longer moving average (MA)
from the shorter moving average
• Unbounded Indicator
• Common indicator setting is 12, 26 and 9 EMAs (signal line)
• Positive MACD (above 0) means the shorter MA is above
the longer MA and gaining momentum
• When MACD crosses center line it signals that the shorter
MA crossed the longer MA
• Some traders use the crossover of the MACD and signal
line to enter and exit trades
• Often shows signs of trend reversals through divergence
Stochastic Oscillator
• Momentum Indicator
• Shows location of close relative to the high-low range over a
set period
• Common interval is 14 %K with a trigger line of 3 %D
• The trigger line is used to enter and exit trades
• Range is from 0 to 100
– > 80 is overbought
– < 20 is oversold
• Not ideal for trending markets, but great in sideways
markets
• Used to recognize divergences as well
Relative Strength Index (RSI)
• Momentum oscillator which measures change of price
movements
• Common interval is 14
• Range is 0 to 100
• Overbought when > 70 and oversold when < 30
• Considered bullish when > 50 and bearish when < 50
• Like most oscillators, works best in sideways trends
• Can be used to find divergences
Final Thoughts
• You can draw on indicators to find support and resistance or
divergence
• Never use just one indicator to make trading decisions
• Be careful of indicator overload, i.e. analysis paralysis
• The perfect indicator does not exist
Charting Software
Charting Software for Stocks
• Purpose: To plot a financial instrument’s price over time
• Types
– Desktop Applications
– Web Applications
– Other (i.e. Excel)
Which One is the Best?
• There isn’t a perfect solution
• Determining Factors
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Financial Instruments
Cost
Data Series
Time Frame
Analysis Type
Indicators
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Drawing Tools
Scanning Options
Back Testing / Strategies
Alerting Options
Connect to Broker
Recommended Solutions
• My Personal Recommendations for Beginners
– Broker
– StockCharts.com
– ThinkOrSwim
• Resource Document on STG Meetup page
Next Meetup
Approach Trading
Like a Business
February 23, 2014
1:00 PM – 3:00 PM
Southeast Regional Library
Meeting Room B
10599 Deerwood Park Blvd.
Jacksonville, FL, 32256
Questions?
References
• http://www.investopedia.com/university/technical/techanalysi
s7.asp
• http://stockcharts.com/help/doku.php?id=chart_school:overv
iew:technical_analysis
• http://stockcharts.com/school/doku.php?id=chart_school/