What's so special about charts anyway? We all know what they look like. When you see a chart with jagged up and down lines, you think "stock chart" without a second thought. But the real power of charts is to help you visually see high and low odds opportunities, significant events, and the behaviors of other investors.  Proper use of charts in your analysis, strategies, and investment decisions increases your odds instead of random 50/50 gambling.  Most people just use stock charts to look up a stock's price, but you can do that with a table of time and price.  You don't need fancy computer processed charts for that. The same way satellite maps and street maps shows a different picture of an area, many types of charts have been developed to tell different angles of a stock's story.

The simplest charts are nothing different from graphs of election votes or sports stats.  Simple charts can show stock prices as well as other stock market data (# of stocks going up vs down, for example) and economic data.  The top of the line charting software feature choices of what chart types to show, all the technical analysis tools, and common technical indicators as well as those you can code yourself. The amazing thing is many of these top stock chart software are free through brokers websites and places like FreeStockCharts.com and StockCharts.com. No software to download and no installation required.  Charting software are often included in as a part of a larger trading platform.  However, no 2 charting software packages and websites are alike.  Each offers different stocks and data you can chart, chart settings available, technical analysis tools, and technical indicators you can add.  Your investment strategies, risk tolerance, and experience will determine what package gives you the tools you need.

 

The Basics

Here are the four basic areas to consider when choosing charting software.

  1. Experience. This is always your most important first assessment. What information are you used to analyzing?  Does the charting software package have all the tools and speed to do what you need?  Seasoned traders use charts for forecasting as well as being able to study existing and new relationships that develop between two variables. Beginner traders and investors use charts and chart drawing tools to highlight patterns and areas of importance.  Later, they can refer back to these highlighted areas on the chart to see how it relates to how the stock continued to move. For example, a price chart of the stock RIG might show a steady price increase over the past 6 months, and then a sharp drop in the past week. Is it a reversion to the mean? Is it earnings season and RIG had a bad quarter? Was there technical pattern development that could have predicted this occurrence? These questions are useful to understanding why RIG may have dropped. The beginning trader should use various chart drawing tools and try different chart types (such as Candlestick vs. Line charts) to help them see patterns and relationships that develop on a chart.
  2. Trading Style. To better understand what features you’ll want in a charting software package for your investing style, you need to know your investment goals and outlook.  Most modern charting software and websites, Yahoo! Finance being the most basic, allows at least daily, weekly, and monthly time frame charts.  For most long term investors, that is enough detail.  But it’s incredibly difficult to trade the market short-term while using 1-year charts on RIG, and vice versa, using implied volatility charts (30-day) to trade the variation in the market for the next 10 years would be insanity.  Advanced features and performance for charts, some free and some paid, tend to be for active investors and traders who analyze the market constantly.  But these advanced tools, technical indicators, etc. that’s not found on your typical Yahoo! Finance chart can be very useful to investors as well.
  3. Risk Appetite. Most investors are extremely risk averse and want a longer term buy-and-hold strategy.  Financial advisers convince people to look at an investment’s past 3-5 years as evidence of which asset to invest their money. But this assumption leads many with risk aversion into a tunnel vision. Instead of assessing the current situation, they just assume that the past and the present are the same, and thus a similar outcome will happen.  Remember, charting tools are only good as your understanding of the current situation. Thus, the more you can base your decision off, the higher probability of success.
  4. Asset Class. The type of asset class dictates the type of chart or plot that you need to use for analysis. Real-time charts for stocks are all over the place nowadays, and you can analyze different timeframes, charting styles, add in technical indicators (a.k.a. studies), etc. Derivatives (options & futures) analysis usually combines time plot and charting with volatility and interest rates comparisons. Volatility analysis at different points in time based on expiration dates for options is an increasingly important tool, along with interest rate spread analysis, etc. Understanding your investment goals and what asset class you are interested in trading can help you figure out what charting tools you need.

The Styles

Time Plots

  • Types: Stock Charts, Treasury Yields, Futures Charts, Forex Charts
  • Pros: Extremely useful for understanding price variation, technical and pyschological analysis, pattern trading, predictive and historical analysis. Readily available on all platforms
  • Cons: Time domain plots are non-causal & thus patterns don’t always recur, time analysis is extremely common and therefore institutional investors have the edge
  • Summary: Time plots are the most common charting analysis tools that are available for traders and investors. They are extremely useful for pattern trading and historical data analysis, but can sometimes lead traders to be to “one dimensional” in their trading methodology. Just remember, trading the charts is only one of many ways to invest in the market.

Maturity Plots

  • Types: Yield to Maturity, options pricing, floating rate contracts
  • Pros: Useful in understanding the relationship of any derivative or fixed income with respect to maturity dates and/or contract expiration. Analysis for spread plots are more “fixed” than time plots due to specific reactions based upon proximity to maturity or contract expiration
  • Cons: Not useful for common stock analysis, Pattern development is predictable so arbitrage is less available, a lot less liquid markets
  • Summary: Analysis with these charts are mostly for floating rate contracts, spreads and derivative contracts that have an expiration or maturity date. Not useful for charting patterns and short-term trading due to lack of arbitrage, day-to-day volatility (movement), and predictable nature of investment

Profits & Losses Plots

  • Types: All Asset PnL Plots
  • Pros: Useful for understanding the given profit or loss opportunity at one point in time (usually at expiration for options or for a particular entry/exit/stop loss analysis for stocks, futures, forex)
  • Cons: Only one snapshot in time based upon a specific set of variables -- makes it hard to figure out what you’ll actually earn because analysis doesn’t take volatility or variation due to time into account
  • Summary: PnL Plots are useful for dissecting a cross-section in time of what someone might earn based upon a specific scenario setup. It is not useful for calculating your actual profits or losses (especially in options), as the parameters may change.

Compare & Review Charting Software »

 

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