Knowing When Area Charts Matter for Stocks - dummies

Knowing When Area Charts Matter for Stocks

By Greg Schnell, Lita Epstein

One of the keys to successful chart reading is recognizing downtrends and uptrends soon after the trend has started, and area charts make that easy. Area charts are very clean and simple to use. Filling the space below the price really highlights the trend for the stock.

The other advantage to area charts is the ability to see the big picture by extending the amount of history that is being shown. Much like the line chart, you don’t lose a lot of information by adding a longer time period for the chart.

An area chart is a great chart type for people new to charting. It highlights the price action without complicating it. Long-term money managers like to use clean charts such as area charts to demonstrate the trend. Television channels consider the area chart style one of the best types to work with for their audience.

One of the main problems when using charts is understanding what matters. Because area charts have very little detail, they are for big-picture trading rather than day trading, for example. Trend lines as well as horizontal support and resistance levels are easy to see.

Stocks that have been trending up for years don’t continue forever. BlackBerry phones are a great example of something being all the rage and then falling out of fashion. At one time the stock was over $145 per share. It lost half its value before the earnings per share started to decline. The changing trend in the long-term stock price almost always happens before the earnings decline.

Stocks don’t just grow to the moon and stay great forever. Stocks have growth phases, and then they normalize again. Some of these trends can last a long time, but eventually they stop. Investors want to catch the big moves up but need to sell to capture the gains when the stock stops rising. Area charts are a great way to see that big-picture change in trend.