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In today’s financial world, the saying “knowledge is power” applies more to investors and traders than ever before. Understanding how to read stock charts is an important part of technical analysis and has become virtually essential for any risk-taker looking to achieve long-term success in the financial markets.
For traders, knowing how to interpret stock charts opens up various intraday and swing trading opportunities. Investors can also quickly peruse a chart to assess how a stock has performed over a specific period of time to get a better idea of how the stock might perform in the future. If you’re new to trading or investing, learning how to read a stock chart as part of technical analysis can provide a solid foundation for forecasting future price action even in turbulent times.
What are Stock Charts?
A stock chart consists of a graphic depiction of the price of a stock as it has traded over time and is generally drawn on a grid. The chart’s horizontal or X-axis shows the dates of price observations in an order further from the present as you move your eyes left.
The chart’s vertical or Y-axis shows the price level of the stock that increases when looking upward and decreases when looking downward. A stock chart will often include technical indicators in a box below the price action as well as price action overlays like a moving average (MA) of the price taken over a certain number of days.
One-year candlestick chart of Apple Inc. Source: TradingView
This example of a stock chart depicts the price of Apple Inc. (AAPL) over the past year. It includes a 20-period MA drawn in red and superimposed over the price action, as well as blue dots from the parabolic SAR indicator that gives trading signals intended to reflect short-term accumulation and distribution activity in the stock. The trading volume figures per period appear in light red and green along the bottom of the chart with their 20-period MA shown in orange. The circled E and D letters along the bottom represent the ex-dividend and dividend payment each quarter for the stock.
How to Read a Stock Chart Basics
Most stock charts depict the price of a stock in these basic ways:
Line charts: This very simple type of chart shows the price of the stock at a given point during its trading day, typically the closing price, with a single point. Each price point is then connected to adjacent prices with lines.
Bar charts: The more sophisticated bar chart shows the range of the stock for the period charted by drawing a vertical line or “bar” from its high to its low price. A horizontal “flag” is then drawn to the left and to the right at the opening and closing stock price levels respectively.
Candlestick charts: Invented in Japan, the candlestick chart is packed with even more information than a bar chart. The color of each candlestick indicates whether the stock’s price closed up or down for the period. White and black or green and red are the most popular color schemes, with white or green for up periods and black or red for down periods.
The candle’s “body” shows the range of the stock price from open to close, while 2 wicks extend from the top and bottom of the candle’s body showing the upper and lower levels respectively of the stock’s price range. Interpreting candlestick charts according to the traditional Japanese system evolved over centuries of market observation lies outside the scope of this introduction, although it is worth researching to help boost your forecasting abilities.
Reading Trend Lines
Reading trend lines is a way to assess whether a price trend exists for a particular stock. Price trends are directional movements that consist of a set of higher highs and higher lows in a stock’s price.
Trend lines can be drawn between those highs and lows, and they can provide technical analysts with a quick visual assessment of whether a trend exists and to what degree.
Many analysts also use trend indicators along with drawing trend lines, such as the 200-, 50- or 20-period MA.
Reading Stock Splits
Stock splits generally occur when a stock has risen significantly enough to make the stock price too high for average investors to buy in round lots of 100 shares. The stock split makes the stock available to more investors and generally fuels more demand, often causing the stock price to gain after the split.
For example, if a $100 stock splits 2 for 1, then the stock would open at $50 per share the next day — existing stockholders would then own twice the amount of stock they did before the split. A reverse stock split is the reverse of a stock split. For example, a stock trading at $1 per share has a reverse 10 to 1 stock split. For every 10 shares owned, the stockholder would subsequently have 1 share at $10 per share.
Stock splits and reverse stock splits are generally adjusted for on a stock’s price chart on the day the split occurs. You do not have to take splits into account when reading stock charts produced by professional charting services or trading platforms.
Reading Trade Volumes
The degree of interest that the market has in stock tends to appear in the stock’s trading volume numbers. Notable shifts in trading volume can offer a helpful indication to support a directional movement in the stock.
Keep a keen eye on volume figures since changes in the activity level of the stock can confirm breakouts from the classic continuation and reversal patterns technical analysts look for in a stock’s price — they can have predictive value.
If a stock’s price increases on a large amount of volume, for example, it’s probable that the stock will continue to rally and therefore tends to confirm the upward move. The same concept tends to hold if a stock declines on a large amount of volume. When stocks decline, volume tends to increase incrementally as stops are hit, which can further fuel the decline and can even cause a crash.
Stock Chart Terminology
In addition to the price information appearing on a stock chart, a number of other important fundamental stock data is often included with the graph. This information has considerable significance to stock traders and is referred to with specific terminology as follows:
- Ticker: The ticker shows the published flow of transactions in any given stock issue. The ticker was once recorded on a tape and the information printed on it was transmitted telegraphically across the country on a ticker system from 1870 until 1970. Today’s ticker is electronic, but it has the same function of recording the time and sales price of every transaction in a stock, as well as the amount traded in most cases.
- Dividend: The stock’s dividend consists of the amount of money per share that a company pays out on the ex-dividend date to shareholders of record on a specific date. Shareholders need to have owned the stock on the date of record to receive the dividend typically 2 to 3 weeks later on the ex-dividend date. When a stock goes “ex-dividend” the stock’s price is adjusted downward by subtracting the dividend amount from the initial opening price of the stock.
- Yield: A stock’s yield is the percentage of its price that is paid out as a dividend. For example, if a stock is priced at $100 per share and pays a quarterly dividend of $1 per share, then the annual yield on that stock would be $4, which represents a dividend yield of 4% of the $100 share price.
- High and low: Stocks fluctuate during the trading session, reaching a high and a low price point in every trading session. The high and low prices can be very important to technical analysts and short-term traders who derive trading “pivot points” from these significant price levels.
- P/E ratio: The price-to-earnings (P/E) ratio derived by dividing the price of the stock by the amount of money the company has earned over the year per share. Say a company’s stock is trading at $25 per share and the company’s yearly earnings are $3 per share, then the P/E of that stock is $25/$3 = 8.3.
- Open: The initial price of a stock on any given trading day. The opening price is determined by matching all limit and market buy and sell orders received before the trading session begins in order to arrive at a fair initial price.
- Close: The last price a stock traded at when a trading session ends. The closing price is the one used to “mark to market” positions, so it determines the value of any positions held overnight.
Online Brokers With the Best Stock Charts
Top online stock brokers generally provide excellent charts to their clients. In addition, a number of nonbroker websites like TradingView provide excellent stock charts free of charge. Benzinga has compiled a table of online brokers with the best stock charts below.
Stock Charts Are Invaluable to Technical Analysts
While some people may see the interpretation of stock charts by technical analysts to forecast the market’s future direction as something like palm reading, the majority of market professionals depend on stock charts to get a clear picture of price action in the stock they’re operating in.
Most would agree that the condensed information contained in a stock chart gives them an edge when making trading and investing decisions. If you’re serious about operating in the stock market, it makes sense to learn how to read stock charts as the professionals do to give you a better chance of success.
Frequently Asked Questions
What are the best techniques to use in reading charts for beginners?
Some of the best techniques involve looking for support levels, resistance levels, trend lines and changes in the volume.
Which brokers have the best charts?
Webull, TD Ameritrade and Robinhood offer the best charts.
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