Part 2: ASX charts - more charting tools OHLC / Bar chart A bar chart simply takes the information from the day's trading and plots that information on a single vertical 'bar'. A tab on the left side of the bar represents the OPEN price, and a tab on the right of the bar represents the CLOSE price. The top of the bar represents the day's HIGHEST price and the bottom of the bar represents the day's LOWEST price. To create a bar chart select the OHLC Bar option under Chart type. The chart below is a daily chart and shows the OHLC for the past 6 months.
You will notice if you put your cursor over one of the bars the chart will bring up the OHLC, the volume, and the date.
Candlestick charts Candlestick charts originated in Japan and have been used for centuries. They are constructed using the same information as a bar chart (open, high, low, and close). Instead of using a single line however, a rectangle is used to represent the area between the open and the close. The rectangle or candle is left blank or a specific colour like green for an up day and filled or a different colour like red for a down day. The rectangle is called the body or the real body and the single lines at the top or the bottom, if they exist, are called shadows, wicks or tails. The art of using candle stick charts comes in interpreting the shapes that they form and their combinations. There are a myriad of documented combinations that exist and the charting library on the ASX website is a great place to start delving into the world of charting. To create a candlestick chart select the Candle option under Chart type. As with the OHLC bar chart, if you put your cursor over a candle, it will bring up additional information.
Moving Average The moving average is simply an average of the closing prices for the last 'n' days. 'N' equals the number of periods, for example, 5, 10, 20 or 30. So a 30-day moving average is an average of the closing prices for the last 30 days, rolled forward one day at a time. Similarly a 5-day moving average will be an average of the last five days, rolled forward one day at a time. The first step in trading with a moving average is to decide how many days, weeks or months 'n' equals. The larger the number, the smoother the moving average will be. You will also have fewer trades and less false signals. The downside is that you will give away a lot of the move before getting in and before getting out. With a shorter term moving average you will get into a trend earlier and exit closer to the top, but you will also have many trades and many false signals, therefore more losing trades. The common way to trade the moving average is to buy a stock if its price breaks above its moving average and to sell it again when the price falls below the moving average. Now before you go racing off to plot the moving average on every stock and buy everything that rises above it a few points are worth remembering. Nothing works all the time. Indeed the moving average is an indicator that can keep you in an uptrend for its entire duration. It is also good at keeping you out of the market during a downtrend, as the price will remain below the moving average. In a non-trending market however the moving average will ALWAYS see you lose money when traded in its classic fashion. In a sideways market the moving average will travel through the middle of the prices and signal the trader to buy high and sell low every time. This is a sure-fire way to lose money. So a moving average should only be applied to a trending market (see below). To use a moving average, go to the Price Moving Average box. And you can select from the 5, 10, 20 or 30 day moving average
You may wonder why you can put in two moving averages. Two moving averages are often used and when one crosses over the other this can be used as a signal. Before using the charts to help with trading decisions it is vital that you educate yourself further to learn more about how technical analysis and tools such as moving averages can help with your trading and then it takes practice and testing to see what you will use and combine as trading signals.
Understanding a trend One of the basic rules of trading is to avoid trading against the trend. So it is always helpful to have a look at the trend of a share price before investing. An uptrend must have both higher highs and higher lows not just one of these, so the line will be heading upwards. It is the opposite for a downtrend lower lows and lower highs, so your line or bar chart will be trending downwards. Sideways means that the prices are trading in a range and not moving out of that range - if share prices are neither going up or down significantly they are said to be trending sideways. Remember, one of your main aims in investing is to buy shares and then sell them at a higher price. Therefore, to make a profit you want the share to be trending upward.
Volume indicator Volume is important as it shows you how many shares have been traded over a certain time frame, usually a day. Volume can help in a number of ways. 1) If there is a strong move up or down, volume can give you an idea as to how strong the move is. If the volume is high this means there are a lot of buyers or sellers stepping in and trading, so it is a strong move. If the volume is low, the move is weaker as there are not a lot of buyers and sellers involved. You may see that there is a downturn in the price of a share that you have bought; however, when you look at the volume, you see that it is fairly low. This suggests the downturn is fairly weak and may not last. So you might consider holding onto the stock for the present rather than selling it. 2) Volume is also important because it gives you an idea of how many buyers or sellers are currently in the market. If there are not many buyers (low volume), it may be difficult to sell your shares at that time or for the price you want. So if the trading volume is low and the market is fairly volatile, you might decide to not buy these shares as a quick exit may be difficult. Having said this, the companies in the Game are all quite actively traded so this should be less of a problem. Want to learn more, see our Technical analysis lesson, this covers more on charts, understanding trends etc.