Commonly Used Stock Charts By Technical Analysts

Technical analysts use stock charts to analyze their trades. These charts are used to analyze what the trend of the stock is and which are the support and resistance levels where the stock should be bought or sold.

What is a stock chart?

A stock chart is a graphical representation of the price of the stock and how it has changed with time. The chart can be plotted in various ways and you need to use the one that you can read the best.

There is two axis in the stock chart, the horizontal axis, and the vertical axis. The horizontal axis represents the time period for the chart and the vertical axis represents what the trading volume is that corresponds to the time period.

Technical analysis uses many kinds of charts; however, the popular ones used are the line chart, bar chart, candlestick charts and the point and figure charts. The nature of how the price is inputted varies for different charts as well as how the data is represented is different in each chart.

Line chart

This is the simple way to plot stock chart. It shows how the price has changed over time. The chart uses the closing price of the stock and depicts it as a point. Once there are series of this points they are joined to form a straight line. The chart can be plotted for any time frame. It is easy to use but it does not show a lot of information that is needed to trade using technical analysis.

Bar chart

This is an advanced version as compared to the line chart. The bar chart marks the open, high low and close price of the stock. The bar chart is not continued like the line chart. The advantage of the bar chart is that it lets the trader see the pattern formation easily. Also, the data that is plotted on the bar chart is more than that on the line chart.Since the bar charts are not colored this is why it loses out to candlestick charts which use different colors for bearish and bullish candles.

Candlestick chart

Candlestick charts trace their origin to Japan where it was first used some 30 years before. This is the most popular chart that is used by traders. The candlestick chart also plots the open, high, low and close of the candle but shades the bearish and the bullish candle with different colors. This makes it easier to visualize what is happening.

Point and figure chart

These charts only show some significant price information like the X’s and the O’s without giving any consideration to time. The price is placed on the horizontal axis and the time unit is determined as per when the trend changes.

A Practical Example Of Earnings Multiplier

Earnings Multiplier is perhaps the most analyzed and handy tool to assess the value of a company or business under consideration for the sale, acquire or partnership. The owner also can take a look into how his company has grown in terms of cash flow through the years since it helps to compare the current market price of a stock with respect to earnings per share over the different time periods. It also demonstrates the position of the company in comparison to its counterparts or competitors.

Both the seller and the buyer can take fruits out of the basket by business valuation. While the buyer gets a chance to financially and logically examine the consequences of buying the business under consideration. The seller can utilize this detailed report to study the operation of his business, how it has transformed over the years and if he can change any negative plunges instead of handing it over completely to another owner.

A simple example to illustrate the tool

You have a company manufacturing textiles which you inherited from your father. The company had gone public when your father was the owner and was priced at $30 per share. The company then had earnings of $10 per share. The earnings multiplier is $30/$10 per year = 3 years, which implies that the company would have taken 3 years to get back the stock price of $30 and is running at 3 times earnings.

The current market price of each share of your company is $100 and the income is $20 per share. Then the current P/E ratio of your business is $100/$20, which is 8, that is, currently your business is running at 8 times the earnings. A comparison of P/E ratio for the two generations gives you the difference in the production efficiency of your business. Since business valuation analyzes almost all aspects of an operating business, it is convenient to know the faults and areas for improvement. This example shows that the current price is more expensive than the former calculation 3 years ago and will be less attractive to a new owner or the acquiring company.

In a second case, you can compare the asset worth of your business with other companies working in the same genre and with the same classification. Another textile manufacturing company has a current stock price of $100 and earnings per share of $10, giving a P/E ratio or multiplier of 10 years. This means that the second company is more expensive than your company and lesser chances of getting preferred by a buyer or partner.