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Overlays are technical supplements which help to interpret the data of a normal price chart.
Often a chart program will allow the user to pick a few different overlays at a time, to help him or her get a better idea of what is going on with the price. Some common overlays include moving average lines, Bollinger Bands, Ichimoku clouds, and channel lines.
An overlay or series of overlays will appear as additional lines, shading, or other graphics on a price chart. An overlay helps a trader or analyst interpret the price data in the context of other data, by putting the other data right on top of it.
Channel lines and Bollinger bands, for instance, attempt to show the trader what range the stock has been trading in, as a factor of volatility and direction of a moving average, so that if the price goes above or below these lines, the trader can make a decision about whether this presents a trading opportunity.
Some other common overlays might be the MACD, the Directional Movement Index, Ichimoku clouds, pivot points, and volume information.
If a trader is able to see everything at once, he is more likely to be able to understand what is causing the movement in a stock’s price or to confirm that a specific thing is taking place.
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