The Basics of Reading Stock Chart

Investing in the stock market entails that you learn and understand fundamentals like stock quotes and stock charts. When it comes to learning how to read stock charts a lot of questions arise like what is a stock chart? How do I use a stock chart? What’s in a stock chart? Etc.

The learning process of stock charts may seem difficult at first but with the right lessons and practice, you’ll begin to get a hang of it. When you properly learn how to read a stock chart, you’ll be able to find winning stocks, know when to buy stocks, and spot the right time to sell a stock. Learning how to read stock charts is important for all stock market investors especially in the current coronavirus market crisis. Regardless of high volatility and news headlines, understanding stock charts will help you stay focused and look for meaningful changes in market trends, rather than rely on external factors.

What is a stock chart?

A stock chart is referred to as a price chart that shows a stock’s price plotted over a period of time. A typical stock chart shows a stock symbol and exchange, chart period, price change, last change, types of charts, and volume.

The stock symbol and exchange represents the “symbol” of a stock and the specific exchange it trades on. 

The chart period is typically the time frame of a stock chart. It can be daily, weekly, monthly, quarterly, or annually. Mostly, traders rely on daily and intraday data to forecast short-term price movements. Weekly and monthly charts are used to forecast long-term price movements.

The price change shows the price movement of a day’s trading. They are: open, high, low, and close. “Open” is basically the price start of a trading day while “close” is the price end at the close of the day. The “high” is the highest point during trading sessions for the day while the “low” is the lowest point. 

The last change shows the net change (positive or negative) from a previous price. This happens on a daily basis on account of the previous day’s close.

There are basically three types of charts used in stock charts: Line, bar chart, and candle and stick chart. The line plots the closing price of a chart over a time frame to help you see a price behavior. The bar chart plots the open, high, low, and close (OHLC) for each day in bar forms. While the candle and stick chart is similar to the bar char only that it shows the OHLC data in an easier way.

The volume is the amount of stock that has been bought and sold over a period of time. For example, if a stock moves on high volume, it means more people are involved in the trade and the trend is likely to continue. However, if the volume is low it means that only a few people are involved in the current price movement and the trend will most likely not continue.

How to read a stock chart

When it comes to reading a stock chart, a level of mastery must be attained. At whatever level you are, you can still read a stock chart, but for effectiveness, it is better to attain a certain level of mastery. Underline below are some guidelines.

1.    The trend line

The trend line is the blue line you see on stock charts. It is either going up or down. The upward and downward movement of the trend line is a typical representation of how stock fluctuates. Sometimes stocks climb really high and other times they take a deep dive. That is why it is expedient to be able to read and understand a stock chart to be able to spot when is the right time to buy or sell a stock. The trend line is an indicator pointing you to details to pay attention too, regardless of other factors that ravage the market like volatility and economic declines.

1.    Lines of support and resistance

Lines of resistance and support shows the levels of stocks stay within a specific period of time. A level of support typically shows the price that a stock is unlikely to drop below, while a level of resistance is the price that the stock is unlikely to go above. This mostly happens in stock charts except in the event of a major change like a reduced profit margin. The goal is to be able to know when to buy and sell.

1.    Dividends and stock splits

Located at the bottom of the chart are a company’s dividends and stock split. A dividend refers to a portion of a company’s earnings that is distributed among its shareholders. This varies by companies as some companies do not pay dividends, rather they focus on growth. Such companies end up reinvesting their earnings rather than distributing profits amongst its shareholders. Some other companies are grounded enough to pay dividends without sacrificing growth. A stock split is a strategic move initiated by a company’s board of directors to issue more stocks to the public. Stock splits do not affect the value of a company but it may affect the price. Often, companies do this if their stock price isn’t in line with competitors or when they want to attract smaller investors. 

1.    Historic trading volumes

The small vertical lines at the bottom of the chart represent the trend volumes at which stock is traded. Volumes are useful tools in determining whether to buy a stock or not, However, they shouldn’t be your only determining factor. Trading volumes usually increase when there is a major news about a company, whether good or bad. Increasing volumes can shift the price of stock quickly.

Tip

Once you gain mastery of reading stock charts you should be able to analyze a stock based on its historic activity. One thing to always remember is that past performances do not correlate to future price indications. That a stock price hit an all-time high of $200 last week, doesn’t mean it will be that forever. It may increase or decrease by the next day.