A chart is simply a graphical representation of a series of
prices over a set time frame. For example, a chart may show a stock's price
movement over a one-year period, where each point on the graph represents the
closing price for each day the stock is traded:
Figure 1
Figure 1 provides an example of a basic chart. It is a
representation of the price movements of a stock over a 1.5 year period. The
bottom of the graph, running horizontally (x-axis), is the date or time scale.
On the right hand side, running vertically (y-axis), the price of the security
is shown. By looking at the graph we see that in October 2004 (Point 1), the
price of this stock was around $245, whereas in June 2005 (Point 2), the
stock's price is around $265. This tells us that the stock has risen between
October 2004 and June 2005.
Chart Properties
There are several things that you should be aware of when
looking at a chart, as these factors can affect the information that is
provided. They include the time scale, the price scale and the price point
properties used.
The Time Scale
The time scale refers to the range of dates at the bottom of
the chart, which can vary from decades to seconds. The most frequently used
time scales are intraday, daily, weekly, monthly, quarterly and annually. The
shorter the time frame, the more detailed the chart. Each data point can
represent the closing price of the period or show the open, the high, the low
and the close depending on the chart used.
Intraday charts plot price movement within the period of one
day. This means that the time scale could be as short as five minutes or could
cover the whole trading day from the opening bell to the closing bell.
Daily charts are comprised of a series of price movements in
which each price point on the chart is a full day's trading condensed into one
point. Again, each point on the graph can be simply the closing price or can
entail the open, high, low and close for the stock over the day. These data
points are spread out over weekly, monthly and even yearly time scales to
monitor both short-term and intermediate trends in price movement.
Weekly, monthly, quarterly and yearly charts are used to
analyze longer term trends in the movement of a stock's price. Each data point
in these graphs will be a condensed version of what happened over the specified
period. So for a weekly chart, each data point will be a representation of the
price movement of the week. For example, if you are looking at a chart of
weekly data spread over a five-year period and each data point is the closing
price for the week, the price that is plotted will be the closing price on the
last trading day of the week, which is usually a Friday.
The Price Scale and Price Point Properties
The price scale is on the right-hand side of the chart. It
shows a stock's current price and compares it to past data points. This may
seem like a simple concept in that the price scale goes from lower prices to
higher prices as you move along the scale from the bottom to the top. The
problem, however, is in the structure of the scale itself. A scale can either
be constructed in a linear (arithmetic) or logarithmic way, and both of these
options are available on most charting services.
If a price scale is constructed using a linear scale, the
space between each price point (10, 20, 30, 40) is separated by an equal
amount. A price move from 10 to 20 on a linear scale is the same distance on
the chart as a move from 40 to 50. In other words, the price scale measures
moves in absolute terms and does not show the effects of percent change.
Figure 2
If a price scale is in logarithmic terms, then the distance
between points will be equal in terms of percent change. A price change from 10
to 20 is a 100% increase in the price while a move from 40 to 50 is only a 25%
change, even though they are represented by the same distance on a linear
scale. On a logarithmic scale, the distance of the 100% price change from 10 to
20 will not be the same as the 25% change from 40 to 50. In this case, the move
from 10 to 20 is represented by a larger space one the chart, while the move
from 40 to 50, is represented by a smaller space because, percentage-wise, it
indicates a smaller move.
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