Episode 09

Option Trading: Charting 101 with JJ Kinahan

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In this option-trading education podcast, JJ Kinahan, Chief Market Strategist at TD Ameritrade, and his guests discuss charting basics and some of the key terms to know.

Audio Transcript


This is Understanding Options. I'm your host, JJ Kinahan.


JJ: Hello, everyone. I'm JJ Kinahan, Chief Market Strategist at TD Ameritrade. And welcome to today's show. I'm joined today by TD Ameritrade Education Coaches Ben Watson, Pat Mullaly. And that means lots of knowledge. So today, we're going to discuss charting basics and how to use them. Hey, guys. Thanks for joining me today.

Pat: Thanks for having us.

Ben: Thanks.

JJ: So charts is a big, big, big topic. If you go on the thinkorswim platform, you can get 400 different types of charting programs. You will certainly find something that can please your palate somewhere. So with all that, I want to narrow it down a little bit, though, for the newer charter and talk about the basic type of charts, from the simplistic, with line charts and bar charts, and then maybe we'll even throw in some candlestick patterns. Guys? What do you guys think about that?

Ben: Sure. So let's start with, really, kind of the most basic, and that's a line chart, simply plotting the closing prices of a stock on a chart, charting against time and price, and simply drawing a line between those closing prices. It's simple to follow on the chart. But it maybe doesn't give a trader quite as much information as other types of charting about what might happen intraday, right?

Pat: Right, right. And so that's where the bar chart comes into play. So a bar chart is going to give traders a look at the open, the high, the low, and the close for that day. Or you could turn it to a weekly chart and look for the week. But during those periods of volatility that we see, those bars become longer. During the periods of less volatility, they become smaller.

And so that becomes, actually, an important thing. You hear people all the time saying, hey, boy, I wish I had jumped into that stock earlier. Look, it's going straight up today. It's up 3% or whatever. But they'd ignore the fact that maybe their opportunity was when the volatility was low.

Ben: Right.

Pat: In those small-range days.

Ben: So Pat, there's another type of bar chart. And that's a candlestick chart. And it's becoming, really, more and more popular, right? And all it does is it fills in a lot of the information that a bar chart has and kind of makes the candlestick-- it looks like a candlestick-- makes it look a little bit larger than that bar chart, shows that open and close and the high and the low for the day, and really helps chart readers to see some of that momentum and psychology that's going on in the back and forth between buyers and sellers throughout the day.

Pat: So a little more visual than, say, the bar chart.

Ben: Sure.

JJ: Well, guys, there are terms we always use with charting. And even I can grasp a couple of the easy ones. A consistent upper line in charts over time is an uptrend, huh?

And I'm going to go the other side of this one, that a consistent downward line is a downtrend. So these are ones-- I'm being a little bit sarcastic-- but obviously, pretty easy to understand. But there are some other terms that sometimes I think people hear and they maybe play along, but they're actually not quite sure 100% what's being talked about. So Ben, when someone talks about the term "support," what are they actually saying?

Ben: Yeah. That's a great question to ask, JJ. When we talk about support, the idea is a support level is a price area where price has come down to before and changed direction and started to go back up. And you can think about that as if it were a floor. Now not that that's a guarantee that that's going to be the lowest price that the stock is ever going to go to. But it's a level where price has changed direction before. So we call that a level of support.

JJ: And Pat, how about "resistance"? Because that's-- support and resistance are kind of the yin and the yang of the charting world.

Pat: Yeah. So this is very important, because resistance is a place where people sell. Now support is where demand comes in. Resistance is where supply comes in. And it's really kind of psychological in the way it's built. So if you think about somebody who may have bought a stock at 50 that immediately went to 45, and then it rallied back up to 50, they may want to sell there at what now is resistance, because they want to get out at a break-even.

Conversely, somebody else might say, you know what? It's at 50. I sold it short here, and it dropped to 45. I'm going to sell shares there, right? And so they sell shares at the same spot. And then you have the person who bought it at support, and it rallied back up from 45 to 50, and they sold shares to take a profit. So you have three happy people, psychologically, that are selling for three different reasons.

JJ: I think that's really important. And one of the other things that I think might be a little misunderstood about charting-- and Ben I want to ask you this before we get to Pat on a sort of a real-life example-- is often, I think, people like yourself who chart a lot, you don't just rely on one pattern. You might check that with two or three. Can you just talk a little bit about that, please?

Ben: Absolutely. So we might use not only those candlestick charts that we talked about to help us understand what's going on a day-to-day basis. We may use levels of support and resistance to help us determine what we might expect to see happen when price gets down or if price gets down to those levels or back up to those levels again.

And then we might use, also, some form of technical indicator-- which we'll talk about, I'm sure, in a later episode-- but some other form of technical analysis to help us make an assumption or an assessment of what might happen. And again, not that that's any kind of a guarantee about what is for sure going to happen. But it helps us to make sense of what has happened and what could happen in the future.

Pat: And not only that. An understanding of this-- so when JJ, when you're on CNBC and you talk about, well, so and so LMNOP has hit this area before, this area of resistance. If it breaks through, this may occur. So it's talked about a lot. And somebody sitting there watching financial channels may not quite understand what that is.

JJ: No, I think that that's a good point. And obviously, always good to check with more than one source, so to speak. So I like that. But doing this stuff is no fun if we can't use sort of real-life, educational examples. And I want to go to, as we talk here and getting toward the end of August here in 2018, market just hitting all-time highs on the S&P.

And we'll use Apple. It's such a widely held stock here at TD Ameritrade. Again, Pat, I want to talk about this for education. I'm not recommending it, nor are you, or saying to sell it one way or the other. But it's a good example, 'cause so many people listening hold it. So can you just talk about how this might apply to what we're seeing with Apple right now so that people can use that for any stock they want to talk about?

Pat: Sure. Apple consolidated for a while, meaning going sideways, and kind of chopped back and forth between 190 and 180. And then it broke out over the last three, four weeks and now hit a high two days ago, three days ago, of about 219. Now we're seeing some short-term selling coming in, putting in a little bit of downward pressure on this. Now it may come down to a recent support level of around 210. And it may bounce from there. We don't know.

Ben: So what you're saying, Pat, now is that a resistance level might exist up there around 219, and a support level might exist down here around 210 or so?

Pat: Right. It could develop into that, right? And so these are levels that we watch. And this is really just all about levels-- making decisions, knowing what you're going to do when something happens at those levels.

JJ: And for those of you listening at home, you can bring up the thinkorswim platform if you want to listen to this again. But what I would also think about is Ben and Pat are talking every single day at TD Ameritrade Education about how to think about charting. So hopefully, you'll subscribe to this podcast. You'll see these gentlemen wherever they're presenting loads and loads of education so that you understand this. You can also find more option education at essentialoptionstrategies.com. As always, you can find me on Twitter @TDAJJKinahan. Ben, where can I find you on Twitter?

Ben: You can find me at @BenWatson_TDA.

JJ: And you can always find Pat Mullaly where there is education going on in a smart way about charting, options, equities, futures, whatever. You pick the subject, he's going to talk in a smart way about it. But most importantly, we want to thank all of you for listening. We hope you will continue to do so. Good luck in your investing. And good trading, everybody. Thank you.


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