How Stock Charts Work

Since technical analysis is based on the close examination of stock price charts, the first step toward doing your own technical analysis is understanding how stock charts work.

Traders generate charts using charting software provided by direct-access brokers or third parties. You can also generate charts for free using financial websites, such as Yahoo! Finance (finance.yahoo.com), StockCharts.com (www.stockcharts.com), and BigCharts (www.bigcharts.com).

All stock charts show the share price (and often the share volume) of a stock during a given timeframe, which can range from several seconds to several decades. The most basic stock chart, called a line chart, uses lines to plot the movement of a stock’s share price.

Though traders sometimes use basic line charts to get a quick overview of a stock’s activity, to do technical analysis traders use two types of more complicated charts: OHLC charts and candlestick charts.

OHLC charts use a series of vertical bars, each of which has small horizontal lines that extend to the left and right of the vertical bar. Together these bars indicate various aspects of the stock’s price movement for the current trading day (or another set time period). The top of the bar indicates the stock’s highest price (called the high), the bottom of the bar indicates the lowest price (called the low), a line jutting off to the left side of the bar indicates the opening price (called the open), and another small line jutting off to the right side indicates the closing price (called the close). A vertical line with just one horizontal line indicates that the stock opened and closed at the same price.

Candlestick charts use a vertical line to represent a set time period, such as one trading day. The endpoints of the vertical line indicate the stock’s low and high for that time period. A rectangle is then superimposed on the line to indicate the open and the close. If the stock closed higher than it opened, the rectangle will be either white or green, and its top and bottom lines will indicate the close and the open, respectively. If the stock closed lower, the rectangle will be black or red, and its top and bottom lines will indicate the open and the close, respectively.

The images below show a single stock’s price movement over a 28-day period using the three main types of charts.