Charts and their Patterns

Technical analysts use charts to obtain historical information about individual stocks and markets. On these charts, analysts study the patterns to determine future trends, which will tell them when to buy and sell. These analysts don’t have to know anything about a particular company or business. The charts reveal all! Past price movements and patterns are used to predict future price movements. The popular types of charts used are

* Line charts
* Bar charts
* Point and figure charts
* Candlestick charts

Line Charts

A line chart displays successive stock prices connected by a line over time. For example, this type of chart shows hourly changes to the Dow Jones Industrial Average (DJIA) in a day of trading and the closing prices of a stock or the market over time. Figure 11–1 shows an example of a line chart with the closing monthly prices of Amgen, Inc., for the months April 2005 through September 2006.

Figure 11-1
Line Chart for Amgen, Inc., Using Monthly Closing Prices from April 2005 through February 2006

Bar Charts

A bar chart displays successive high, low, and closing stock prices over time. A bar chart is similar to a line chart, but it incorporates more information. If charting daily stock prices, a bar chart includes the stock’s high, low, and closing prices. A vertical line shows the high and low prices, and a horizontal line shows the closing price. Figure 11–2 shows a bar chart for the following daily prices for a stock:

As more data are plotted, more of a pattern emerges, which technical analysts study. From a chart, they can determine such trends as the upward trend shown in Figure 11–2.

Figure 11-2 Bar Chart

Obviously, there is an art as to the drawing of trend lines because no precise body of data indicates how to draw them. The trend line is drawn from the lowest points to the highest points. After a trend for a stock is established, an analyst follows the stock price to look for any changes in the trend. When the stock price falls below the upward trend line, technical analysts recommend selling the stock because the trend has been broken. Similarly, the crossing of a downward trend indicates a buy signal for that particular stock. Trend lines form the basis for buy and sell signals.

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