Understanding price charts

In simple terms

A price chart is a picture of trading history. The horizontal axis shows time; the vertical axis shows price. Each point records the prices at which buyers and sellers actually traded during a period: a minute, a day, a week.

That is all a chart records. It does not show why prices moved, what the company is worth, or what will happen next. Technical analysis studies these records for patterns; this path teaches the tools and, just as importantly, their limits.

What a chart leaves out

A chart is built from trades. It does not show:

• the news or results behind a move;
• the orders that did not trade, such as waiting buy and sell orders in the order book;
• who was trading, large institutions or small investors;
• the business's value, which fundamental analysis estimates.

Many beginners look at a chart and see a story. The chart can tell you that a price fell sharply on high volume; it cannot tell you whether that was because of bad results, a large fund selling, or panic.

Three chart types

Line chart. A line joining the closing prices of each period. It is simple and clear, good for seeing the overall path, but hides what happened within each period.

Bar chart. Each period is a vertical bar from the low to the high, with a small tick on the left for the opening price and one on the right for the closing price. This is often called an OHLC bar, for open, high, low and close, explained in the next lesson.

Candlestick chart. The same four prices drawn differently: a thick body between the open and the close, coloured to show whether the price rose or fell, and thin lines called wicks or shadows reaching to the high and low. Candlesticks make the open-to-close move easy to see at a glance, which is why they are the most popular chart type. The candlesticks lesson explains them in detail.

Linear and logarithmic scales

The vertical axis can be drawn in two ways.

• Linear scale: each step on the axis is the same number of rupees. A move from ₹100 to ₹110 takes the same space as a move from ₹1,000 to ₹1,010.
• Logarithmic (log) scale: each step is the same percentage. A move from ₹100 to ₹110 takes the same space as a move from ₹1,000 to ₹1,100, because both are 10%.

Use a log scale for long periods and for shares that have moved a lot, so that percentage changes are comparable throughout. Use a linear scale for short periods where prices have not changed much; the two look almost identical then.

How charts can mislead

Charts are graphs, and every lesson in the misleading statistics lesson applies to them.

• Chosen periods: a chart starting at a low point makes any rise look dramatic.
• Truncated axes: an axis that does not start at zero can make a small move fill the whole chart.
• Scale choice: linear charts of long histories exaggerate recent moves.
• Hindsight: charts shared on social media are usually chosen because a pattern worked.

Before drawing any conclusion, check the period, the scale and the axis.

Why it matters

Every technical tool in this path is built on price charts, and many investors look at charts every day. Understanding exactly what a chart shows, and how its presentation changes what you see, is the foundation for using the later tools sensibly and for not being misled by charts other people share.

Limitations

A chart records past trades only. It cannot show value, news or intentions, and its appearance depends on choices about period, scale and chart type. Prices on charts may also have been adjusted for corporate actions, as the adjusted prices lesson explains.

Common mistakes

• Reading a story into a chart that the chart cannot tell.
• Using a linear scale for long histories.
• Ignoring the period and axis chosen by whoever made the chart.
• Assuming the chart type changes the data. Line, bar and candle charts show the same trades differently.

Try it yourself

1. Open a free charting tool or the exchange website and choose a share with at least ten years of history.
2. View its full history as a line chart on a linear scale, then on a log scale. Note how the early years change.
3. Switch to a candlestick chart for the last three months.
4. Write down one thing the chart shows and one thing it cannot tell you.