Tips for Stock Charts That Enhance Your Analysis

How to select the best chart settings for technical trading

Reviewed by Gordon ScottFact checked by Suzanne Kvilhaug

Charts are a technical trader’s portal to the markets. With so many advances in analysis platforms, traders can view a tremendous assortment of market information. With so much data available, it’s important to create well-designed charts that will enhance, not hinder, your market analysis.

Many popular trading sites come with built-in charting tools that allow you to automatically include technical indicators and moving averages. For example, TradingView is used by over 50 million users to share chart analysis, and many brokerages and trading platforms have their equivalents. Read on for some tips on how to make the best possible stock charts.

Key Takeaways

• Technical traders use a variety of stock charts to analyze market data in order to pinpoint optimum entry and exit points for their trades.
• By setting up efficient charts and workspaces, you’ll gain quick access to the data you need to make profitable trading decisions.
• To create a well-designed stock chart, you’ll want to be careful in your selection of color choices, fonts, layout, indicators, and overlays.
• Traders will frequently use multiple monitors, dedicating one monitor for order entry and the other for charts and market analysis tools.

Chart Colors

While it can be fun to experiment with different chart colors, and many chart analysis platforms support literally hundreds of color choices, you should remember that a lot of time will be spent looking at the chart. Choosing colors that are easy to view is a must. Not only do individual colors on the chart need to be visually pleasing, but they all must also work together to create a well-contrasted chart.

Background Colors

In general, chart backgrounds are best kept to neutral colors; white, gray, and black work well. Bright or neon colors may become intolerable over even a short period of time and can make chart indicators harder to see.

Once you’ve selected a pleasing, neutral background color, you can fine-tune the rest of the chart. You’ll need to select colors for things like grid lines, axes, and prices. Again, it is a good idea to leave these in a neutral color, but one that contrasts with the chart background. A light gray background with a black or dark gray grid, axes, and price components, for example, creates an easy-to-read chart.

Price Bar and Indicator Colors

You can apply price bars and indicators to your chart and the colors for these should really stand out from the chart background. After all, this is what you’re really watching. Price bars in red (for down bars) and green (for up bars) will show up well against any of the neutral background colors. In addition, most analysis platforms provide a variety of shades of reds and greens to choose from to further increase visibility. Price bars in black (for down bars) and white (for up bars) stand out very well against a gray background. Indicators should be in contrasting colors so that any data can be easily seen and interpreted.

Special Color Considerations

An additional idea to consider is using different colors for charts that serve different purposes. Maximizing the visual impact of your stock charts will depend upon the types of indicators you use for your analysis. For example, you might create some graphs to determine entry and exit decisions, while you create others simply for learning purposes. If more than one symbol is being traded, you might consider a different background color for each ticker to make it easier to rapidly isolate data for each individual stock.

Important

The Technical Analysis course on the Investopedia Academy includes interactive content and real-world examples to enhance your knowledge of the indicators and tools that are key to trading success.

Chart Type

Specific Chart Type

In the realm of stock market analysis, choosing right chart type is so important. Each chart type offers a unique perspective on market data, and you may find yourself making discoveries easier when looking at one specific type compared to another. The three primary types of stock charts – line charts, bar charts, and candlestick charts – serve distinct purposes that each have value in different ways.

Line charts provide a simplified view of an asset’s price movement by connecting closing prices with a line. To enhance your analysis, think about using a line chart when you want to see something over time as it’s a great tool for trend analysis over a period.

Bar charts, on the other hand, present a more detailed representation of price action. They display opening, high, low, and closing prices in the form of vertical bars. Bar charts are particularly useful for short to medium-term analysis where you want to look at a quantity of something (as opposed to something over time).

Last, we arrive at candlestick charts. Candlestick charts are perhaps the most widely used among active traders. In some ways, candlestick charts blend the benefits of line and bar charts as they convey both time and impact value. Each candlestick represents a specific timeframe and displays opening, closing, high, and low prices. The information you get from a candlestick chart may or may not be more helpful than other types of charts.

Chart Timing

Once you know about the different types of stock charts, the next step is picking the right one for your needs and the time frame you’re looking at. If you’re thinking long-term and want a simple view, go for a line chart. It smooths out the little ups and downs, showing you the overall direction over a long period.

If you’re into shorter-term information or want more details, try bar charts. They show you the opening, high, low, and closing prices for each period, giving you a good overall picture. Note that you may still prefer to use a line chart for short-term analysis; you’ll just want to make sure to flip your filter or type to look at day, hour, or even minute time frames on your x-axis.

Volume

When we talk about trading volume, it’s how many shares are changing hands in a given time. High volume usually means a lot of people are buying or selling, showing strong interest. Low volume suggests less excitement. This information actually holds a lot of value when looking at the price movement of a stock.

You can look at volume patterns to confirm trends. If a stock’s price is going up, and lots of shares are being traded, it’s a sign that the trend has energy and many people agree. There’s conviction behind the trend because a lot of people are backing the movement. On the flip side, if prices are going up, but not many shares are being traded, it could be a warning that not everyone is on board with the trend and it might be a fluke.

Most charting platforms allow users to add a volume indicator below the price chart, representing the number of shares traded during each period. Like above, traders can customize the settings to choose the time period they want to analyze. To enhance your analysis, consider incorporating looking at volume in your charts along with price.

Layout

Designing the overall workspace (all of the charts and other market data that appear on your monitors) requires consideration as well.

Multiple Monitors

Having more than one monitor is extremely helpful in creating an easy-to-interpret workspace simply because there is more opportunity to follow more securities. Ideally, one monitor should be used for order entry and any remaining monitors are used for charts and other market analysis tools.

If you’re using the same indicator on multiple charts, for instance, a stochastic oscillator, it is a good idea to place like indicators in the same location on each chart, using the same colors. This makes it easier to find and compare the specific indicator on different charts. Figure 1 shows an example of a two-monitor workspace, with the order entry screen on the left monitor and the chart analysis screen on the right monitor.

Figure 1: A two-monitor workspace with order-entry and chart-analysis screens. Charts created using TradeStation.

Indicators and Overlays

To minimize extraneous market data, be sure that all of the data (including indicators) is pertinent, useful, and is being used regularly. If it is not, remove it from the chart—it will only create clutter. Carefully choosing what is included on charts is a matter of trial and error; you should experiment with different data to discern between necessary and unimportant analysis tools. More than four or five open windows or charts on the same screen can get confusing. 

A main price chart can include overlays—those indicators that are drawn directly over the price bars. These include tools such as moving averages and Bollinger Bands®. We’ll talk more about those trendlines in the next section.

Charts can also contain sub-charts to house additional indicators such as the Consumer Confidence Index (CCI) and the relative strength index (RSI). Remember to arrange the indicators in the same way on each chart so it will be easier to find and interpret the data.

Trendlines

When setting up the format of a stock chart, incorporating trendlines and highlighting support/resistance levels adds so much information. Trendlines are like guideposts for investors, outlining the general direction in which a stock is moving. These include standard moving averages or custom values.

Drawing them on a chart helps to visually grasp the trend’s strength and potential reversal points. Support levels can act like safety nets for prices, preventing them from potentially falling further. Resistance levels act as barriers, limiting upward movements. The only way you’ll be aware of these is if you format you stock chart to incorporate these features that reveal these trendlines.

Consistency is so important for effective chart analysis. Thankfully, many stock chart options will calculate the trendlines you want to see – you’ll simply have to pick what you want to see. For example, you may have the option to toggle trendlines that show 10-day moving average and 50-day moving averages. These lines can reveal additional information to you that enhance the decisions you make.

Sizing and Fonts

Using bold and crisp fonts will allow you to read numbers and words with greater ease. Font size should be determined by how many charts are squeezed into one monitor, the relative importance of any written information, and ultimately your ability to read fine print. It is helpful to experiment with different fonts and sizes until you find a comfortable choice. Once you’ve decided upon the font and size, consider using the same selection on all charts. Again, this continuity will aid in creating charts that are easy to read and interpret.

Saving Charts

Once you have a chart or workspace setup you’re happy with, you should save it for future use. (See the platform’s “Help” section for directions.) It’s not necessary to reformat your charts and workspaces each time you open the analysis platform. It’s also a good idea to take a screenshot for backup purposes. Since setting up the charts and workspaces is time-consuming, it’s in your best interest to have a quick method of restoring any lost settings. Choose a broker with whom you feel comfortable but also one who offers a trading platform that is appropriate for your style of trading.

Where Can You View Stock Charts?

A variety of financial websites offer a multitude of chart options for stocks, mutual funds, exchange-traded funds, and other financial securities — including Investopedia.

Do You Have to Make Your Own Charts?

No, you don’t have to create your own charts to analyze stocks. There are numerous apps and financial web sites that offer customizable charts. Professional or technical traders are more likely to work from self-created charts, in addition to whatever charting software they are using.

Can You Use Stock Charts for Day Trading?

Yes, the techniques described in the story for creating stock charts can be applied to day trading by developing charts to analyze shorter-term market trends and stock patterns.

The Bottom Line

Although time-consuming, setting up efficient charts and workspaces is well worth the effort. Being able to quickly access and interpret market data is an essential component in the competitive trading arena. You may have all of the right information to make smart trade decisions, but if you can’t find and interpret that data quickly, it is useless. Creating high-performance chart setups can help you increase your situational awareness and thus become a more efficient and profitable trader.

Read the original article on Investopedia.