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How to Read Stock Charts

Have you always wanted to dive deep into the details of predicting how a stock might perform? Always wondered how the broader market impacts a stock over time? The best stock charts are instrumental in helping you learn the ropes. 

Think of a stock chart as similar to a patient’s chart at a doctor’s office. The best way to make a diagnosis is to look at a medical chart to see the history, symptoms and other unique factors about a patient. Similarly, stock charts allow you to put a magnifying glass to the inner workings of the market so you can understand how a stock might behave.

Tag along and we’ll show you how stock charts work. It’s imperative that you learn how to read a chart — just like a good doctor pores over a patient’s chart to do some detective work. 

What Stock Charts Can Tell You

Stock charts burst with technical indicators, and wrangling that amount of information is like wrangling everything there is to know in all the best stock trading software. The basics can be mastered, luckily. Indicators do way more than tell you how a stock trades at a specific point in time.

Stock charts can help you determine what a stock might do and can guide you so you’ll know whether to buy, sell or hold. You can learn how to analyze chart patterns and flush out uptrends, downtrends, whether a stock is trading sideways and even give you details about the company as a whole. 

That begs the question: What happens if you don’t use stock charts? 

A stock chart can help you the way blinders help a horse or a map helps you know where you’re going as you drive from Maine to California. Not using a stock chart might mean that you’ll run off course, as you might imagine.

Like a map, a stock chart can help you see what’s happening with a particular stock and can help you drill into what’s important. Stock charts enable you to do some detective work on price changes, historical highs and lows, dividends, trading volume and other vital information. 

You only want to buy a stock when it’s already moving in the right direction — up. There’s no clear trend when a stock trades sideways, and of course, when it’s heading south, you’ll want to avoid it altogether.

Can you determine which way this particular stock is going at different intervals? Up, down or sideways?
Source: www.quora.com

Price and Volume Action

Stock charts are little more than a bit of fancy detective work. They can tell you whether a stock is being bought or sold in large quantities through the purchase actions of fund managers and other institutional investors. All stock charts display price and volume and these are 2 critical components of a stock chart. 

Stock chart volume is the number of shares traded during a given time period. Stock volume is a measure of the number of stock shares that have been exchanged or traded within a specific period of time. Volume is usually plotted horizontally as a histogram along the bottom of the stock chart. It can also be plotted right on the top of prices.

The stock price on a stock chart reflects the current trading price of a stock. Together, both stock price and volume can tip you toward noticeable cues so you know what to do with your stock. Volume and price are only valuable when you combine the two factors, and one of the keys to checking the price and volume action of a particular stock is to look for unusual spikes in the stock you’re investigating.

Support or Resistance

Support is a price level where a stock will stop moving downward depending on demand. As the price of assets or securities drops, demand for the shares increases and forms the support line. Meanwhile, resistance zones arise due to a sell-off when prices increase.

Think of it as a floor of support or a ceiling of resistance. 

Look for a floor of support or a ceiling of resistance on a stock chart when you’re analyzing support or resistance.

A stock might pull back and you’d want to see if it finds support at key areas, such as in a moving average line, the average price of a security during a specific time period.

For example, a 200-day moving average looks back in time and averages the price over the last 200 trading days. A 50-day moving average does the same over 50 days. These indicators are often used to find buying or selling signals. As the price drops and approaches support, buyers (demand) become more inclined to buy and sellers (supply) become less willing to sell.

A stock finds support when large investors buy up a particular stock. You might want to hold or add shares to your position when you see evidence of many investors buying a particular stock because it shows that fund managers are buying shares. 

On the other hand, a stock might not find that support and could burst through a moving average. That’s an excellent “sell” signal because it shows that fund managers have gotten rid of shares. 

Basic Chart Types Can Offer Valuable Information

You’ll be able to get specific information from a few of these charts. 

Source: fidelity.com

Bar chart: Bar charts include the high, low and closing of the day or week to chart a trend. Bar charts give traders a better idea of how the stock traded throughout the day, and it specifically shows daily volatility. You’ll see open, high, low and close that determine the price plot for each period of a bar chart. You can also see the high and low on the top and bottom of the bar, which are represented by a horizontal dash. 

Source: fidelity.com

Line chart: A line chart is the simplest chart because it only requires you to have the stock’s last price.

Source: fidelity.com

Candlestick chart: Candlestick charts show when the stock closed higher (bearish) and when it closed lower (bullish) using different-colored candlestick figures. According to Fidelity’s description, traditional candlesticks offer a hollow (white or green) body to indicate an “up” day in that day’s price action. You’ll see a closed (black or red) if the close is lower than the open to indicate a “down” day. A single vertical line shows the high and the low, which are called the “wicks” or “shadows.” 

Source: commodity.com

Point and figure: Point and figure charts only look at price changes, no volumes or dates, and use a series of X and O figures to make up the chart.

Reading a Stock Chart: Step-By-Step 

Ready to learn how to trade a stock chart? Here are some basic steps to get you started.

Step 1: Choose a Stock to Observe

Determine which stock you’d like to track. You might have a stock already in mind or you might want to compare a few different stocks. Arm yourself with the ticker symbol, also called a stock symbol. The ticker symbol is an abbreviation that’s used to identify publicly traded shares of a stock.

Each ticker symbol is unique and contains a mixture of letters, numbers or a combination of both. For example, Apple’s ticker symbol is AAPL on the New York Stock Exchange (NYSE).

Step 2: Check Out Price and Time

Price and time can be found on two axes on a stock chart. Time is located at the bottom of the stock chart (on the horizontal axis) and the price of the stock is found on the side of the chart (on the vertical axis).

You usually have a lot of options to determine the time period you want a stock chart to reflect. Prices are plotted from left to right across the x-axis and the most recent plot is on the far right side of the chart.

Source: fidelity.com

The time and price axes are the key to helping you see where the trend lines fall, which will help you determine what’s in store for the stock you’ve chosen.

Step 3: Assess the Trendlines

Check to see where the trendline is… well, trending. Is it moving up, down or sideways? Make sure the trendline doesn’t pass through any prices. You should be able to draw the trendline underneath the lows if the price rises. Conversely, you’ll draw the trendline above the price highs if the price is falling. The majority of prices should be contained above or below the trendline.

At this point, you’ll look to see where the trendline changes. A sharp rise or fall in prices is most often caused by unusually high trading volume that will return to its normal level.

For example, a trendline above a 45-degree angle is more likely to correct. On the other hand, an angle between 30 to 45 degrees is more likely to hold. It’s a good idea to avoid anything below a 30-degree line because that’s most likely headed into negative territory. 

Step 4: Note Patterns and Determine an Outcome

Look for spikes in trading volume: recent highs and recent lows. Get used to seeing patterns and apply indicators to charts so you think you’ll be able to better predict how a stock performs. Apply support, resistance and trendline drawings to identify trading opportunities.

Once you become comfortable reading stock charts, it’ll become easier to determine specific patterns. The more adept you become, the more you’ll be able to make money off of the stocks you trade. 

Learn More

Ready to learn more? The best advice is to read as much as you possibly can about stock charts. Let’s say you want to do everything in your power to learn about day trading. You might want to tap into one of the best day trading courses

There are many different types of charts available, and one is not necessarily better than the next, according to Fidelity. The way it’s presented and interpreted will vary. You can choose any type of chart you prefer or use multiple types of charts for analysis. For example, you may use a combination of a bar chart and a line chart to analyze stocks or you might look solely at a point and figure chart. 

Whether you choose just one or a combination of both, remember that reading a chart is like a detailed roadmap or like blinders on a horse, which can help guide you toward the right buy, sell or hold actions. 

Interested in learning more about trading stocks? Check out Benzinga’s guides on how to create an investment strategy, or the best portfolio trackers.

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