Investors and other members of the financial industry live and breathe finance charts. They can be concise ways to analyze and interpret data in a fully visual way. However, to anyone who is not an expert, these charts may seem like a confusing series of jagged lines.
It is actually quite easy to read a finance chart once you understand the information that goes into producing one.
First, you need to understand that a finance chart is usually measuring a single metric over a period of time. This is not always the case, but it is true most of the time. To graphically represent this data, we need to create a grid which allows us to plot where our metric is at any given moment.
The grid is broken up most simply into two areas. There is the vertical area and the horizontal area. Each of these is called an axis of the finance chart.
The horizontal axis (left-to-right) usually represents the time over which the metric will be measured on the chart. Placing things closer to the left of the finance chart will mean it happened earlier than things placed towards the right side of the chart.
The vertical axis (bottom-to-top) represents the value of the metric we are going to measure on the chart. Dots placed near the bottom of the finance chart represent lower numbers than those placed closer to the top.
All finance charts come with what are called keys, like a map key, which indicate what each of the axes represent. For a chart of stock values, for example, these could be showing months of the year horizontally and dollar value vertically. The key will also indicate the scale of the values used on the chart. Each horizontal inch could represent a month, a year, or ten years. It is very important to know the scale of measurement being used when reading a finance chart.
There are many different ways that the data can be graphically represented on a finance chart, but they are all really showing the same thing. If we know that in March a stock was worth $10, then we can draw an imaginary line from the place where March is located on the finance chart in the horizontal axis and stretch it up until it intersects an imaginary line drawn out from the vertical axis that represents $10. Where these two lines meet on the finance chart will create a point.
The points can be represented as simple dots, connected dots which will create the familiar zigzag lines often seen on most finance charts, or even as ascending solid bars representing each month.
However the data in the finance chart is represented, it is important to remember that it is really just an index into the grid created by the two axes. Follow the point down to find the date you want, and follow it right or left to find out the value at that time. This is how you read a simple finance chart.