A while back I produced the podcast called Technical Analysis Top Ten List, and in the prologue I said that I would cover each of the top ten in subsequent podcasts. Well, here I’m going to talk about charting, and cover this important topic from two perspectives:
- 1. An overview of the components of a candlestick chart
2. How to create and annotate charts using StockCharts.com
This tutorial will assume that you don’t have a paid membership with StockCharts.com, and where appropriate I’ll refer to member-only features. But let me say this before we go further, if you’re serious about investing, you’ll want to either buy a high quality program, or get yourself a subscription to StockCharts.com.
Now, there are a lot of great charting programs out there, some are desktop applications that are platform-specific, meaning they only run on Windows, some are cross platform, running on both Windows and Mac, some are Mac only. But they are a much smaller group. Many of the great charting programs are integrated into your trading platform, like TradeStation, eSignal LiveCharts, IQCharts, or Fidelity’s Active Trader Pro. Many of these programs are included with your brokerage account and have realtime streaming data. The most accessible to virtually anyone with an Internet connection, are the online, browser-based applications.
Besides StockCharts.com, there are other notable online charting programs like BigCharts and interactive charts with Yahoo Finance. There are many others, but none come close with the depth, breadth and simplicity of StockCharts. And anyone can use StockCharts cor free, they also have various subscriptions with different levels of service, including realtime charting.
All right, so let’s start with the basics of the type of stock chart that you’ll use the vast majority of the time, and that’s the candlestick chart. It’s called a candlestick chart because each individual division that plots price looks like a candlestick. It has a body and a tail that looks like the wick of a candle. Each one of these candles plots the price history of the security from open to close.
If you’re looking at a daily chart, then each candle on the chart represents the price movement from the opening to closing bell. There are two basic types of candles, solid and hollow, or red and white. The white or hollow candle represents a positive movement from the open to the close, the red or solid candle represents a negative movement in price from the open to the close.
On a hollow or white candles, the open is plotted from the bottom of the candle body, and the close at the top of the body. The wick represents the extent that price moved during the time period. On Solid, or red candles, the open is at the top of the candle body, and the close is at the bottom. So, from this simple chart element, you can tell a lot about the movement of price during the period that the candle represents.
Chart Attributes and Indicators
All the chart attributes are located below the chart, and are presented as a number of drop-down menus and check boxes. You enter the symbol in a text box to the upper left of the chart, then click an update button to draw the chart.
The most important attributes of a chart to set are the periods and range, the range is the total visible timeframe (1 month, 6 months, 5 years, etc). Without a subscription you only have daily and weekly charts to choose from. You can get by with these if you’re simply interested in long-term trend trading, but if you want to do technical analysis you need both smaller and larger periods. The smaller periods I use are 60 minute, 10 minute and 1 minute. I also use monthly period to identify long term trends.
The next most important setting is the size of the chart. This is the physical size of the chart, how much screen real estate it takes up. As I said in the Top Ten podcast, the bigger the better. Without a subscription the biggest size you have is landscape, it’s a pretty good size for quick and dirty work, and with the default daily period, it allows you to see 6 months of data. Landscape fills up a 15 inch screen. If you have a 20 inch screen you could you could see well over a year’s worth of daily data.
Now I often talk about primary and secondary indicators, where the primary are volume and MACD, and the secondary are the moving averages and the RSI. StockCharts by default shows volume as an overlay to price so that you see them within the same pane. This makes it very easy to correlate price movement with volume. The other defaults have the MACD in a pane below the candlestick chart, and the RSI above.
Then finally their are the indicators. StockCharts shows the simple 50 and 200 day moving averages, but I also like to see the 20 day moving average. When markets are more volatile, I opt for the exponential moving average instead, because it tracks price movement much better.
The last thing that really makes the chart for me is the color scheme. Now, this is a very personal choice, and most chartists stick with a single theme, as do I. The scheme really sets the tone for the chart and says something about the chartist, I guess. I’m a huge fan of beautiful sunsets, and plus I want a theme the is compatible with the wilderness theme. So Sunset is my favorite. I believe it’s soothing on the eyes, provides sufficient contrast between the background and the various chart elements, and it looks professional. I’ve seen some people use a black background with neon colored chart elements. I think it’s gaudy, and gross, making it difficult for me to concentrate on the chart.
Whatever scheme you choose, stick with it. Sure, you can refine it over time, but don’t be in the habit of completely changing it up for the sake of change. Choose a scheme that makes the chart readable rather than making it fancy schmancy. Simpler in this case is definitely better. You don’t want anything to cloud or distract from the story your chart is supposed to convey.
StockCharts provides a Java applet, that allows you to annotate your charts right inside your web browser. This feature is available only to everyone, but if you are not a subscriber then you can’t save your annotations, you’ll have to take a screenshot to transfer the annotated chart to your trading log or file system. The ability to annotate is the most important tool in your charting arsenal. Sometimes I’ll open my charts into Photoshop to add additional artistry that is beyond the capability of the applet, but I’m sure there are plenty of lesser expensive graphic programs that will do a fine job as well.
The two features I use the most are the line tool for illustrating trends, and the balloon text box, which lets me write a short note and then extend the balloon to point at the feature I’m trying to expound upon on the chart.
Saving and Sharing Charts
As a subscriber, you can save the annotations and keep the chart live, so that you can retrieve it at any time and see how the chart has progressed with respect to the annotations you drew. Or you can save the chart as a static snapshot, then retrieve it later, or create a linkable version, that can be shared with others.
When you save the chart, the applet goes away and your annotations are imbedded in the graphic on the web page. From here you can save the graphic by right clicking it and select the Save Image As… from the popup menu. Another quicker way is to simply click and drag the image to your desktop, or into a folder, where it will be saved as a PNG file. PNG files can be imported into just about any program, like Word, Mail and Pages, or uploaded to your MobileMe gallery or web page.
Becoming a proficient chartist should be top on your list of skills as an investor or trader. Your trading strategies should be documented, and the best way to do that is with charts. Many professional traders keep a log of all the positions they take, and that log typically contains numerous annotated charts that contain the reasoning behind the strategies and positions they take.
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