None of these charts need be used on its own. A wealth of additional information on the chart will add a level of perspective or even explanation. For instance, adding the movement of an index – whether the FTSE100, the All Share or the sector of that company – can show whether it is moving with the market. If it is not, that may prompt further research. It is also possible to see the rate of change of a price over the selected time span.
Transforming the chart line to a moving average can smooth out the daily fluctuations. Making it a weighted average gives greater weight to more recent price movements, and making it an exponential weighting adds greater sophistication. That sort of tool helps spot a trend or a change in one.
If you can find a website that also provides annotations to the charts, that would give yet another insight into what is happening and why. The most usual type of notes include dealings in the company’s shares by its own directors, and newspaper or stockbroker comments on the company.
The relative strength index measures the level of a share price relative to itself and its recent history. It is calculated as the average of prices for days when the price rose, divided by the average of the prices for days when the price fell. The index ranges between 0 and 100.
Recent price changes show the sentiment of the market, so the assumption – justified by some research – is that whatever caused them to move in one direction will continue to do so for at least a little longer. It is not invariably a sound investment policy, not just because the market is notoriously fickle, but because it requires continuously active trading at a level where any profits may be undermined by costs and tax.
For those interested in the suggestion, a stochastic oscillator can be used that shows the location of the latest closing price relative to the high/low price range over a set number of periods. It is made up of two lines that oscillate between a vertical scale of 0 to 100: one is the main line and the other is its moving average. Fast stochastic is the average of the last three values, and slow stochastic has a specified period.