Building a Stock Chart to Track and Control Emotions
Stock charts create a frame of reference for the current price. Is the price above the previous high prices for the last year? Is the price at the lowest price of the year? Is the price wobbling within a range and not really doing anything significant?
You can use the various types of charts and their tools to help you better understand market trends and make better trading and investing decisions. Using charts not only helps keep your emotions in check as you invest but also helps you track emotions and opinions that investors have about particular stocks.
This image shows a stock chart using a price bar to represent the trading range for a day. The top of the bar represents the high and the bottom of the bar represents the low. The little tab on the left is where the price started in the morning, and the little tab on the right is where the price closed at the end of trading. The stock shown is Cabot Oil and Gas (COG).
Around September 1, 2017, the price pushed up above $26 to new highs. It had pushed up against this level a few times before and fallen back. Eventually, enough buyers took an interest in the stock to push it above $26. You can also see that the volume (depicted in the bottom panel) was around 5 million shares a day as a rough average for most of August.
All of a sudden, the volume accelerated, and three trading days had a total volume of roughly 22 million, or more than 7 million shares a day. That extra volume of 7 million shares at $26/share is probably not a household investor buying shares. That totals over $182 million.
Using the chart, you can very quickly see the previous lows and highs on the chart. Because the stock is trading in the top right corner at fresh one-year highs, the stock looks to be hitting the ceiling of the chart.
Charting software fills the chart using the previous highs and previous lows. To do this, it adjusts the scale. As the stock price continues higher, the software adjusts the scale to accommodate the latest price information and fill the space vertically.
By using charts, you can see the broad picture of all the investors, and the price action shows you that they were buying more stock as the price made new highs. Without doing any investigating into the company’s earnings or the products it’s selling, your first clue is that opinions are getting more optimistic, a trend that is showing up in large institutional-size investing.
After you have a frame of reference for the price on the right-hand side of the chart, you can look back through the history to see other pieces of information. When and how did the stock bottom out? What was the size of the trading range for the year? Are the price bars changing in size? You can see that the stock has been moving higher on a jagged path since the lowest price in November 2016.