How to Read a Stock Index Chart
When it comes to trading the stock indices market the stock index chart is the basic trading tool used by all traders. The stock indices chart will show info about a stock indices instrument - the stock index chart will show the general direction of stock index prices, the chart will also show the current price of a stock index and the chart will also show the historical movement of chart stock index prices.
Traders will use these charts to determine where to place trades. From the chart the trader will analyze the stock indices market movements using technical indicators so as to determine the direction of the market and determine the trade to open.
Traders must therefore learn how to use stock indices charts before they can start transacting in the online stock index market.
The following are the various things that a trader will need to know about stock index charts.
Types of Charts
There are 3 types of stock index charts
Line Chart - this charting method draws a continuous line that connects the closing stock index prices. For example if a trader is using the 5 minutes chart then this line chart will draw a continuous line that connects closing stock index price of the stock indices market after every 5 minutes.
Bar Chart - This chart use bars to represent stock index price movements, and plots OHCL - Opening stock index price, High, Low, & Closing stock index price for that period, for example if the period used is 5 minutes, the bar will represent the stock index price data and the OHCL points for the 5 minutes.
Candlestick Charts - The are the most popular chart types as they are the most visually appealing and they represent the stock index price movements in an easily identifiable way which clearly show when a market moves up or when it moves down using different colors to differentiate the direction. These candlestick chart look like a candle and they have a body that resembles the wax part of a candle and an upper and a lower poking line that resembles the wick of a candle.
Stock Index Chart Periods - Chart Time-Frames
A stock indices chart will draw charts based on different time periods - these are 1 minute, 5 minute, 15 minute, 1 hour, 4 hour, 1 day, 1week and 1 month. The period used to draw chart data is also referred to as a stock indices chart time frame, for example the 5 minute chart period is commonly referred to as the 5 minute chart by trader. This 5 minute chart time frame will represent data for the five minutes of trading, after those five minutes another set of data will be used to draw another chart representation. For examples if a trader is using candles chart, the data of one candle will draw data of that five minutes, after those five minute another candlestick will be drawn using stock index price data of the next five minutes - when these candlesticks are combined they then make a graph representation that shows the general direction of stock index prices commonly known as the trend. Traders can then use this information to make trading decisions.
Because the most commonly used charts are candlesticks charts we shall discuss how to read stock indices charts specifically candlestick charts.
How to Use Candlestick Charts
The candlestick charts uses candle that have different colors to represent different stock index price moves, blue candles show stock index prices closed higher than they opened, red candles show stock index prices closed lower than where they opened. This color representation is then used by traders to determine when price has moved up or down.
The candles also show OHCL:
O - Opening Indices Price
H - Highest Indices Price
C - Closing Indices Price
L - Lowest Indices Price
These stock index price points are represented using a formation which looks like a candle, the distance between the opening stock index price & closing stock index price is represented by what is referred to as the body, this part resembles the wax part of a candlestick. The high stock index price is represented by a poking line protruding up-ward, this line resembles the wick of a candle, the low stock index price is represented by a poking line protruding downward and it also resembles a candlestick wick facing down.
Candlesticks
A trader can also add a stock indices indicator on the stock index chart so that they can interpret the trading chart market using these indicators. Traders will need to place indicators on the stock indices so that they can get additional information about a stock indices trend and therefore be in a better position to make a more informed trading decision. These indicators can be used to predict the likely market direction that the stock indices market is likely to keep moving in whether up or down.
A trader can use indicators such as the moving averages and Bollinger to determine the trend. Traders can also use other indicators such as the RSI and stochastic oscillators to determine when to open trades.
Stock Indices Trend lines are also used to determine the direction of the candlestick charts trends and these lines can drawn on the charts to show this direction. A upwards trend will be revealed by a stock indices trend line is moving up while a stock indices trend that is moving down will b e shown a stock indices trendline which is moving downward.
To learn how to draw a stock indices trend line & how to trade using analysis a trader can learn about the trend line lesson under the learn stock indices lessons section of this web site, for indicators a trader can learn about stock indices indicators and their analysis on the stock indices indicators section of this site.