What is a chart?
Charts/graphs make data analysis and interpretation very easy. Suppose, if we give you last 5 years of daily price data of TATA motors, you cannot conclude anything just by looking at the numbers because of the sheer volume of data. But if we make a graph by plotting this data and then show it to you, you can easily find out what happened to the stock price near last Diwali or which were the periods when it went up/down. Thus, understanding charts become very important for investment analysis.
Generally, we deal with 2-dimentional charts with time on horizontal axis and price/volume/other parameters on vertical axis. To understand what information is presented by every single point on a 2D chart, we can drop a straight line parallel to vertical axis on horizontal axis and a straight line parallel to horizontal axis cutting vertical axis. Suppose, the point at which line cuts horizontal axis is x and the point at which other line cuts vertical axis is Y, then the point represents that the price of the stock was Rs Y on X date. Horizontal axis can have different time units as smallest interval: seconds, minutes, days, weeks etc. In a graph with smallest horizontal unit as seconds, we would be plotting prices at each and every second. When the unit is week, we will have just one price for every week and we would be plotting these prices for different weeks. It could be weekly average price, last traded price or first traded price, depending on the requirement. If I want to plot last year’s price series of a stock, and keep day as the smallest unit for time axis, I need 365 data points to complete my graph. For the same time period, if I keep week as my smallest unit, I will need only 52 data points, as there are only this many weeks in a year.
To make this clear, we have shown three graphs below. All graphs plot 3 months stock price movement for Maruti. First chart uses day as the smallest unit and is constructed by plotting daily prices for 3 months.
The second chart below uses a week as the smallest unit.
We can easily see that first chart shows more information, compared to the second one. We can only see average price for every week in the second chart, and not what happened during the week – whether price initially went up then came down or vice versa. In general, charts with small intervals show more details. Just like horizontal axis’s smallest interval, vertical axis’s smallest interval also matters a lot. In first two graphs, smallest interval for vertical axis is 300. Suppose, instead of 300 it was 3000, then after 3900 the next point would have been 4900 directly. In this case the whole graph will shrink, as shown in the 3rd chart.
Let’s now learn more about various types of charts.