What is a Mountain Chart for Trading in the Stock Market?

A Mountain chart in trading connects closing prices of an asset across time, and by filling the area below the prices, it creates a mountain-like figure. Also known as the Area chart, a mountain chart in the stock market, with its intuitive design, portrays price movements and trends visually. The Indian stock market boasts 17.10 crore investors and rising, and being one of them, you must learn about this chart to make efficient trades or investments.

Understanding the Mountain Chart

A Mountain chart during trades is a financial graph that shows the price movement of an asset, such as stocks, commodities, or other assets, with price data.

While an asset is being traded, this chart records its closing price after trading sessions and connects them using a continuous line.

The area beneath this continuous line is shaded, and thus this chart overall takes the shape of a mountain. Thus, this simple visual aid is both a seasonal and a beginner trader to decode how their favoured stock or any other asset has performed over a specified time.

Focusing on its structure, it showcases the overall price direction of an asset. For example, you can easily locate peaks where the price might have moved higher. Dips, where the price went low and a long-term price movement.

What are the Components of the Mountain Chart?

To effectively identify price trends from a Mountain chart in the stock market, you must also have an in-depth understanding of it. For this, have a look at different components:

1. The Line

   To represent the price trend of a security, it connects the closing prices of it over a specified time. This forms a line that portrays its price trend. Suppose for 4 consecutive trading days a company’s stock closes at INR 100, INR 105, INR 103 and INR 108. Connecting these closing prices will generate a line with peaks and dips showing where prices went up or down.

2. The Shaeded Area

   The area beneath the above continuous line is usually filled with colour. This shaded area completes this chart and gives it a mountain-like look. For example, using the above closing prices, the area under the line gets filled with respective colours.

   Usually, a green price zone on a Mountain chart represents a positive price movement. Conversely, a red-filled area represents a zone where the asset’s price falls over a chosen period.

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How to use Mountain Chart in Trading?

Using a Mountain chart while trading, you might be able to understand price trends and make trade and investment decisions accordingly. However, for that, you must first learn how to use it:

1. Locate a Price Uptrend

   On a Mountain chart in the stock market, you can locate an uptrend using its rising mountain ranges. It means you can spot an uptrend if you observe higher peaks progressively and higher troughs across the filled area over time.

   Suppose a stock closes over time like INR 120, INR 128, INR 133, INR 140, INR 147, in 5 trading days. Here, each peak for INR 128, INR 133, INR 140, and INR 147 is higher than its previous and creates a rising range to highlight an uptrend.

• Locating a Price Downtrend

  As the name implies, locating price downtrends on a Mountain chart is quite the opposite of locating an uptrend. Here, you must observe a falling mountain range. You can do it by following the lower peaks and troughs of the chart. Suppose a stock in 5 consecutive days closes at INR 150, INR 142, INR 138, INR 131, and INR 125.

  Here, each closing price is lower than its previous one, and the small troughs between them appear to be dropping. It results in a steadily falling mountain range, reflecting a downtrend.

• Identify the Support Zone

  While trading with a stock market Mountain chart, you must locate a support level for making trade decisions. On a chart, you must look for troughs where an asset’s price previously stopped falling and rose upwards. Connecting such low points with a horizontal line indicates a support zone.

  Suppose the low price points for an asset are INR 106, INR 105, INR 107 and again INR 105. Here, INR 105 might indicate a potential support zone.

• Identify the Resistance

  On a Mountain chart, locating a resistance zone is equally important for trade decisions. Here, you must look for peaks, where an asset price stopped rising upwards and started falling. Connecting these peaks with a horizontal line identifies a potential resistance level.

  Suppose your chosen stock hits INR 140, INR 142, INR 141, and again INR 142, before falling. A horizontal line near INR 142 indicates a potential resistance zone.

Benefits of using Mountain Chart in Trading

Now that you have an idea about what is mountain chart in trading and how to use it to locate price trends, you must note some of its key advantages:

1. Simplicity in Locating Trends

   One key advantage of a Mountain chart is its inherent simplicity in displaying closing prices and locating price trends from it. Both seasoned and new traders might find it easier to look at closing prices of an asset and the coloured area beneath them, and have a visual cue of price trends over time.

2. Helps With Performance Comparison

   With a stock market Mountain chart, you might efficiently compare the performance of multiple assets such as stocks, indices, commodities, currencies, funds, etc, using a single graph. It is because the distinctly coloured areas of it help locate the assets which performed better in a given timeframe.

3. Helps Make Investment Decisions

   As a Mountain chart in the stock market, it showcases price rises and drops of an asset in an easy-to-understand format, and it also helps in locating support and resistance levels. For example, in a support area, if the price repeatedly holds at that level, traders take respective trading positions.

   Conversely, at a resistance area, traders wait for signs of reversal signals. They make informed decisions and take a relative trade position if the price changes its direction from that zone.

Limitations of using Mountain Chart in trading

Aside from noting its advantages, you must also stay informed about its disadvantages. It will help steer clear of making wrong trade decisions:

Focuses Only on Closing Prices

As this chart only focuses on closing prices, it disregards the actual opening, highs and lows of an asset price during any trading session. It means that this chart provides limited information about price movements if you want insights for each trading session. Such a limitation makes it less effective in certain trading situations.

Less Efficiency in Volatility

Another key disadvantage of it is being less efficient in a highly volatile market. In a market where price fluctuation is higher, a Mountain chart might appear distorted. Such an appearance might make identifying trends difficult for traders.

Conclusion

A mountain chart is a technical tool that appears on a trading chart and reflects the closing prices of an asset over a time frame. Here, this chart connects closing prices of an asset with a continuous line and, by colouring the area beneath it, gives it a mountain-like shape.

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FAQ’s on Mountain Charts

1. How does a mountain chart work in the stock market?

The Mountain chart connects the closing prices of an asset through different trading sessions with a continuous line. During price uptrends, the area beneath this line is coloured green, and when price falls, the area appears to be red.

2. How do traders read and interpret mountain charts?

Traders interpret a stock market Mountain chart by noting when its filled area is rising, falling or remains flat. They also look for support zones where an asset made repeated lows and resistance areas where it made repeated highs. They might buy at support, sell at resistance or wait for breakouts.

3. How can I create a Mountain chart?

First, you must start by collecting price data of an asset, i.e. its closing prices through trading sessions. You must use an effective charting tool to plot the data, choose the Mountain chart type, customise its colours, and implement the axes properly to create it.

4. How to read a mountain chart?

To read a Mountain chart, observe how shaded areas move across time and locate the overall trend direction. This shape helps you locate peaks and valleys. However, it might not be detailed enough for precise intraday analysis.