The adage that “a picture is worth a thousand words” may be particularly true for many active investors who love looking at charts. Indeed, a chart can provide a wealth of information about a stock or other financial security.
But are your charts optimally set up to help you make investing decisions based on your specific strategy, objectives, risk constraints, and time horizon? Here are three tips to consider when setting up your charts.
|1.||Choose a time frame that matches your investment horizon.|
When you first open up a chart, it will most likely be set to a default time frame (e.g., six months or a year). One of the first things you should do when setting up your chart is adjust the default time setting to your desired time frame.
Using Fidelity’s brokerage platform Active Trader Pro®, for example, you can adjust the time frame using the preset options (e.g., 10 days, year to date, one year) on the bottom left of the chart or by manually entering a time frame on the bottom right. On Fidelity.com, you can select one of the preset options on the bottom of the page or use the slider to change the time frame (see the chart below).
Choosing a time frame that aligns with your investment horizon is critical—for a number of reasons. If you are a longer-term investor with a five- to 10-year time horizon, for instance, looking at an intraday or one-week chart wouldn’t make much sense. Instead, you might choose to look at a five- or 10-year chart so that you can get a broader sense of the long-term trend that more closely aligns with your investment time horizon.
Another reason that adjusting the time frame to align with your objectives is important is because the trends that may be evident over the course of one period of time can appear much different when looking at another time frame. For example, a downtrend could clearly be present in a one-month chart. However, if you were to change the time frame for the same chart to one year, that one-month downtrend could look more like a minor correction amid a much longer-term bullish uptrend. Consequently, looking at different time frames can provide much-needed context.
A potential solution is to look at multiple time frames—all at once. In Active Trader Pro®, you can easily open up four windows in a single screen. If you were employing a sector rotation strategy, for instance, you might choose to look at three- and six-month time frames to get a sense of the shorter-term trends, as well as one- and five-year windows to evaluate the longer-term trends.
Looking at all these time frames can help you understand the whole picture.
|2.||Select the type of chart.|
Common charts are line charts or open-high-low-close charts (OHLC charts). OHLC charts are more commonly referred to as bar charts. On Fidelity.com, OHLC charts are the default option. You can adjust the chart per your preference (see the chart below).
Each plot on an OHLC chart show four pieces of price information, whereas a line chart—which is the most simplistic type of chart—plots just closing prices and connects each plot with a line.
On Fidelity.com, if you click “Settings” above the chart, it will allow you to change to a “mountain” or “candlestick” chart, in addition to an OHLC chart and a line chart. A mountain chart is similar to a line chart, with the exception that the area underneath each plot is shaded in, intending to help show trends more clearly. A mountain chart is not commonly used.
On the other hand, a candlestick chart quite dramatically changes the look of a chart and is popular among many advanced chartists. Candlestick charts enable candlestick pattern analysis—a method of technical analysis that seeks to find identifiable and repeatable patterns based on charts consisting of Japanese candlesticks. Candlestick charts are most applicable for advanced chart users who are familiar with candlestick pattern analysis.
|3.||Select a comparable index and add technical indicators.|
Once you have the time frame and type of chart established, it may help to place the stock or security that you are looking at in context of the broad market. One way to do this is to add a comparable index or security to the chart.
For instance, if you were analyzing a technology stock, it might be beneficial to add the S&P 500® Index or a technology index to compare it with. This can help add more context to the stock’s performance by comparing its relative strength with the rest of the market or a comparable benchmark or stock. On Fidelity.com and Active Trader Pro®, you can easily do this by selecting “Compare” above the chart and entering an appropriate selection (see the chart below).
Other things that you might consider adding to your charts are technical indicators—such as moving averages, the relative strength index (RSI), or Moving Average Convergence-Divergence (MACD)—to help identify trends, to determine whether the security is overbought or oversold, and to help decide at what price level to buy or sell.
There are a great number of indicators that you can add to your charts by selecting “Indicators” above the chart on Fidelity.com or in Active Trader Pro®. Once you’ve started using charts more regularly, you can experiment with these indicators, along with other chart settings, to help you best see the whole picture.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917