If truth be told we are exposed to charts everyday of our lives, a lot of the time without us even realising it. They are used in our weather forecasts, countless news items, in presentations at work or at school and even at the supermarket on our food packaging. From a very early age we are taught how to construct a chart; first on paper and then on to simple computer programs such as Excel and PowerPoint. Usually the purpose of our charts is to display the results of a science experiment, a maths problem or the results of a survey. So from childhood we are taught to read and work with the fairly simple language of the chart.
If you think about it all a chart really does is represent a set of data in an extremely visually appealing way. The chart doesn’t make the data; the chart doesn’t collect the data. A set of statistics, results or information already exists and by constructing a chart it is almost as though you are giving this information a voice. The difference between a set of numbers in an Excel spread sheet and a chart constructed from this data can be so profound that the chart almost gives the figures meaning! Studies have shown that we are much better at spotting information that is interesting to us than describing what it is that we are looking for so the visual appeal and simplicity of a chart is an instant hit with the way our brains’ function.
In The Context Of The Financial Markets
Let us move this article into the context of the financial markets. In this case the chart is most commonly used to display price over (very importantly) a period of time. Now price represents the value of one share in the stock market, one contract in the futures market or one unit of base currency in the foreign exchange market. Time can be adjusted to show information ranging from one tick (the smallest movement possible in price) to multiple years at a time. Why is time so important? When making decisions about investments it is very important to consider where price has been in order to determine where price is likely to go. Well sure the price of EBAY (ebay) is $33.70 per share now but what was it yesterday $34, $44? This study of historical price charts is known as technical analysis.
The Importance Of The Price Chart
It used to be the case that the only way to keep track of price movements in the financial markets was in print over the ticker tape or the financial section in news papers. This situation is comparable to the difference noted between the visual appeal of Excel cell data and charts constructed from it. Data could be plotted manually onto a chart but the process was painstaking and tedious. It wasn’t until the arrival of computers and software that could plot this information instantly for you that technical analysis became so popular and mainstream. It is fair to say that the price chart is technical analysis when you consider that without it chart patterns and technical indicators would not exist.
The price chart is a truly multitasking instrument with volume, technical indicators, candlesticks, bars, point and figure, trend lines and daily ranges all added to complement the two key ingredients of price and time.
David Thorpe is a senior contributor for http://www.passion-trading.munbuns.com a free educational resource centre for traders and investors. The goal of the site is to stimulate the minds of its users, enabling them to achieve a greater understanding the art of trading, thus helping them to become more profitable.