Chapter 3
IN THIS CHAPTER
Introducing chart attributes
Picking overlays for the price panel
Placing indicators above and below the price panel
How you set up your chart enables you to get a clear picture of a stock’s trend. In this chapter we show you how to use the flexibility of charting to build a useable display using three key components: chart attributes, overlays, and indicators.
In Figure 3-1 from StockCharts.com
, you can see that the place for setting parameters, known as the workbench, is below the chart. You can access this tool for setting up charts online at stockcharts.com/freecharts/
under SharpCharts. You can then work through the steps online as we describe the process.
Chart attributes give you the primary choices for how you want to set up your chart. Chart attributes define things like the size and shape, the type of price display and color, and the background. Because there are different price display types like candlesticks, bars, and lines, each chart has different display requirements and choices. To show you how this works, we take you through the steps of seting up a chart in this section.
Some important decisions you have to make are the amount of data to display and how you want to display that data. These choices include the time period for the chart, the number of periods you want to display, the setup for the bars, and the type of chart. You also choose the colors and other appearance attributes.
The first group of settings includes the time period for each bar, the dates you would like to see, and the spacing.
When it comes to charts, the most popular time period for investors and swing traders is daily. This means that price information will be for one day. You can see how to set the periods in Figure 3-2. Common time period choices include
For this book, we focus on daily charts. In Chapter 8, we discuss when other time periods should be considered.
Range displays how many periods you want to display, which is an important choice depending on the information you seek. Stock charts show quickly, without a lot of description, where price has been for a particular period of time. When you set the range, you know the stock’s movement for that period of time.
Some default range settings are
Traders or investors choose a time frame based on the type of decisions they want to make. For example:
This area of the chart attributes changes automatically on StockCharts.com
depending on which range you use. Set the range to Fill the Chart, so the software will calculate settings using three components. The software uses the width of each daily price bar, the space between the bars (gap), and the extra bars setting to pick the number of days to display. When you get more expertise, you may want to do your own fills, but that’s more complicated than you need to get right now. In Figure 3-2, the width of each bar is 5, and the space between the bars (the gap) is 1.
Now take a look at the next area of chart attributes. Here you set the type, size, and color of price information (see Figure 3-3).
Type refers to the type of display for the price information. Common display types are as follows (we discuss each type of chart and how best to use it in the chapters indicated):
People read charts on many different types of devices, including desktops, laptops, tablets, or phones, so the size of the chart is a personal decision based on the device you’re using to view the chart.
Everyone has personal favorite colors. You can choose the colors for your chart display. Background color is the first critical choice. This parameter personalizes the chart and allows you to control the overall mood of the display. Using black or dark backgrounds for a change from traditional white space on presentation charts can grab attention. For printing your charts, white backgrounds are best. Using white with gridlines helps for printing, but various color backdrops can help make your chart your own.
You may find the wide range of drop-down menus for setting colors daunting, so initially use the default settings to get you started (as shown in Figure 3-3). As you become more familiar with charting and your personal preferences, you can start playing with the colors of the price information to help you personalize your chart.
Colors can also be used to show whether the stock is moving up or down. For example, you can use green for up and red for down, or you can set them to be the same. You may choose to use gold for both up and down on a chart displaying the price of gold. We go into the merits of using different colors as we discuss different decision-making strategies throughout this book. Figure 3-4 shows blue for the up color and orange for the down color.
Opacity allows you to darken or lighten the price bars. A setting of 1.0 (as shown in Figure 3-4) means as bright as possible. An opacity of 0.0 makes the price invisible. The opacity tool is very nice for using area charts that you commonly see on TV. The opacity options are Auto, 0.9, 0.8, 0.7, 0.6, 0.5, 0.4 0.3, 0.2, 0.1, and 0.0. Note: This feature is available only for members.
Grid lines are easy to see on the screen. The grid setting allows you to adjust the look of the grid lines as well as the darkness of the lines. Your options are
Note: This feature is available only for members.
This area controls how much information is shown in the legend. You can see the legend choices at the far right after the grid choices. The legend information is the amount of information about the stock(s) in the chart and is shown at the top left of the chart. Here are the options:
Volume, which measures the number of stock trades in a day, tends to be a supportive indicator. High volume at certain times can be critical for helping with price discovery. How volume is displayed is unique and not the same as other charting information.
Volume can be toggled on or off by using the volume drop-down menu shown in Figure 3-5 on the left side of the check-mark toggles. The options are
In Figure 3-5, the volume is set in the overlay position. If price is in the bottom corner of the chart, seeing the price or the volume can be problematic because they overlap. Using the drop-down menu to choose Separate moves the volume bars below the price panel into a separate display.
Eight toggles are listed across the bottom of the chart, as shown in Figure 3-5:
Overlays are display formats you add to a stock chart that help you understand price movement. You build overlays by clicking in the Overlays area below a chart. In the drop-down box where it says “None” (refer to Figure 3-1), you select a choice from the drop-down menu. The charting software automatically gives typical parameters. Each time you add an overlay, a new line below appears with “None” in the drop-down box so you can add another. We help you discover how to apply these overlays for making stock choices throughout this book.
The list of overlay choices is significant. Some of the common overlays are as follows:
To give you an example of a common overlay, Figure 3-6 shows a simple moving average envelope on this chart of Apple Inc. (AAPL).
The Reorder option allows you to indicate the order for the various overlays you choose. Style lets you pick one of the following:
Opacity options are the same as those in the Chart Attributes area. Note: These features are available only to members.
Indicators help you see price movement. These options are based on significant research done over the years by some very smart technicians to create indicators that help analyze price movement. Most of the indicators are derived from price, or price and volume. We help you figure out how to apply the indicators for making stock choices throughout this book.
Select an indicator by using the drop-down menu where the word “None” is in Figure 3-7. The MACD (Moving Average Convergence Divergence) is shown as the first indicator in the figure. This is a commonly used momentum indicator. The default parameters are put in, and when you click “Update,” this indicator appears below the chart.
Fifty different indicators are available. Some of the more popular indicators are as follows:
Two indicators need specific discussion (see Figure 3-8 to see the settings for these indicators):
Using the volume indicator setting rather than the volume setting under Chart Attributes allows you to calculate unique things like a moving average of volume. Because volume offers clues in technical analysis, it is used more widely. You can position the volume indicator above the stock data, below the stock data, or behind the price by choosing one of three options: above, below, or behind price.
The price indicator is useful when you want to display two stock prices on the same chart. An example might be the GLD ETF for gold and the GDX ETF, which is an ETF that tracks a group of gold miners. By choosing GLD for the main chart, you can plot the GDX price underneath using the price indicator and add GDX in the parameter box (you can see this setup in Figure 3-8).
If you change the position to “Behind Price,” the chart will display both GLD and GDX on the same panel. The scale for the indicator will be on the left.