Chapter 01 · Reading price and volume
What a price chart records
A price chart is a history of trades, arranged in time. It is not a photograph of value and not a set of instructions. This chapter explains what each mark on the chart actually recorded, and what people add on top that the market never said.
One bar is a summary of many trades
Pick a daily bar. The open is the first traded price of the session, or the official open under the exchange’s rule. The high is the highest traded price. The low is the lowest. The close is the last. Everything that happened between those four numbers is missing. A stock can trade at the high for one lot and spend the afternoon near the low. The bar looks the same as a stock that climbed there and held.
A weekly bar hides five of those days. A monthly bar hides the weeks. A one-minute bar hides almost nothing and still hides the queue of orders that did not trade. Choosing a timeframe is choosing what you are willing not to see. There is no timeframe that contains the truth and leaves the noise outside. There is only a timeframe that matches the decision you are making. A person who will hold for three years does not need the one-minute bar. A person managing a same-day exit does not get much from the monthly bar.
The scale is a choice, and it changes the story
An arithmetic scale gives the same vertical distance to every rupee. A move from ₹20 to ₹40 and a move from ₹2,000 to ₹2,020 look identical in rupees and completely different as a percentage. A logarithmic scale gives the same vertical distance to every percentage. For a stock that has gone from ₹30 to ₹900 over a decade, an arithmetic chart turns the early years into a flat line and makes the latest rally look like the only event that ever happened.
Neither scale is honest by default. Use arithmetic when you care about rupees of profit on a position you already sized. Use logarithmic when you are comparing percentage moves across a long history or across two stocks with different prices. Say which one you are looking at before you describe a trend as steep.
A small table of what the chart does not contain
| You can see | You cannot see |
|---|---|
| Traded prices, compressed into a bar | Orders that were cancelled, or the reason anyone traded |
| Volume, if you turn it on | Whether the volume was one institution or a thousand small accounts |
| A gap between Friday’s close and Monday’s open | Whether the gap was news, a thin book, or a corporate action |
| A long rise | Whether the business became more valuable, or buyers paid a higher multiple for the same business |
Corporate actions are the easiest way to misread a long chart. An unadjusted series will show a cliff on the day of a split or a bonus, as if holders lost money. An adjusted series rewrites the past prices so the cliff disappears. Both series are useful. The unadjusted series matches the prices people actually traded. The adjusted series matches the return a holder who took the new shares would have earned. Know which file you opened.
Drawing on the chart does not add a fact
A trendline is your summary of two or three turning points. A moving average is an arithmetic blend of past closes. A support line is a price where, in the past, buyers showed up often enough that you noticed. None of these is a property of the company. They are descriptions of the file. They become useful when you use them as a checklist — ‘has the price left the area where I said I would be wrong?’ — and they become harmful when you use them as a cause — ‘it bounced because it touched the line’.
The cause, when there is one you can know, sits in the order book and in the news that changed how people valued the business. The line is a notebook entry. Treat it with the respect you give a notebook, not the respect you give a contract.
What to remember
- Open, high, low, and close throw away most of the session. The bar is a summary.
- The timeframe decides which summary you see. Match it to the decision, not to the most exciting picture.
- Arithmetic and logarithmic scales tell different percentage stories. Name the scale.
- Adjust for splits and bonuses before you call a cliff a crash.
- Lines and averages describe the past. They do not obligate the next buyer.