How to read stock charts

Analysing stock charts is an essential component of stock trading. These charts are one of the primary indicators for a trader on the performance of a stock. Trying to trade without referring to these charts at all would quite frankly be unheard of.

So why are stock charts so important? What do they show that is so valuable?

Stock charts show the lowest and highest prices of a stock at various points in time. These values could be displayed over a matter of days to months, depending on the preference of the trader. This will depend on the particular strategy a Trader takes. Traders can then spot patterns in the chart to help them decide how the stock will perform in the oncoming future.

While these charts are of utmost importance, traders usually do need to cross-reference with figures about the volume of stocks traded. The value of a stock on its own may not say much if people are not trading said stock in great quantities. If the volumes being traded is high, then a trader knows that they can easily commit a trade as the stock is in high demand.

Basic definitions for stock charts

So, before we start, we should introduce some basic concepts to know how stock charts work. So, first of all, a stock chart is just like any other stock chart. It is composed of an x-axis, which represents time, and a y-axis usually representing the value of a stock. The y-axis can also represent numerous other figures, including volume of the stock sold, Fibonacci retracements, relative strength indexes, the moving average, Bollinger bands and more.

The charts then have what is known as resistance and support levels. A resistance is the uppermost limit analysts expect a stock to reach. The support is the opposite, the lowermost level. Traders pay close attention to this as an indicator of when they should buy and sell a stock. If a stock comes near the support, traders will buy. If a stock is reaching a resistance, traders tend to sell. These levels are based on the past performance of a stock and can still change. A stock can reach a record high and low and break traders’ expectations completely. These events can be predicted but take a little more knowledge to properly spot them.

Indicators

On-chart indicators are those data points visible on the stock chart. This could be the moving average, the Bollinger bands, and others. This helps traders make conclusions on the underlying trends of a price movement, as they make further calculations on the information available.

Off-chart indicators include such important data points as the volume traded, stochastic oscillators, and a relative strength line. In short, it shows a trader the information that could not be directly implied by the charts, and gives them a view of the bigger picture.

Moving average lines indicate the average price of a stock over a period of time. As such it an indicator of how the market and important investors treat a stock in the long term. It is made up of two separate lines, the blue shows the average over 50 days and the red over 15 days.

A relative strength line indicates the performance of a stock relative to the performance of the market. The steepness of the line shows how fast its’ price is changing. This is a useful indicator to show if a stock is performing poorly (or well), or if market forces are affecting said stock.

Drawing tool for stock charts

The program you use should give you the option of adding and removing any particular data points. This will help you tailor a chart to suit your own particular interests and trading strategy.

Chart types

Data for the chart can be presented in several ways, depending on the type of chart, these are:

Line charts are the most basic type of chart out there. They show either the low or high price-actions on a stock at any particular point in time. So you would have to look at separate charts to understand all the prices for a stock.

Bar charts expand on this a bit. They show the lows and highs of a stock over time. However, traders have to closely look at small horizontal lines to know how a stock is doing compared to the previous day. This can make these types of charts a bit hard to follow.

Candlestick charts are by far the most popular type of chart for traders to use. It shows the low and high price-actions on a stock at a point in time. Their popularity is due to just how much information a trader can glean from it with a short glance. They combine the information of both a line and bar chart, and present them quite clearly. Unfortunately, this also means that these charts can also be a tad difficult to follow. This is why these charts are colour coordinated, to give those analysing them an easier time.

Both of these past two charts are Open-High-Low-Close (OHLC) charts. These charts indicates four points of importance for a stock over one trading day. These are the open, high, low, and closing prices of a stock. The candlestick chart has a wide body that is colour coded to show how it has performed. This is in comparison to the small vertical lines found on a bar chart. The ease of reading candlestick charts, make them a favourite for most traders. Over time, the candlestick chart has actually replaced the bar chart for this reason.

Time period

The time scale at which you are analysing a stock has a strong effect on how what type of trading you can do. If you are looking at price changes over a day, you are most prepared to commit to day trading. This may be the most intense type of trading but can give you the quickest outcome. If you want to look at something which can indicate short term trends, over weeks, swing trading is for you. You may want to take your time and learn as much as possible about a stock before trading. Long term trading necessitates looking at time periods of months, and allows you to properly analyse patterns.

Programs to use

When getting started in trading stocks we recommend traders look at MetaTrader 5 (MT5), an essential bit of software. It can give you access to all the necessary tools of analysis, and modify charts according to your needs. You should also be able to make trades directly on the platform.

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