You want to start trading stocks, huh? This is a bold step that will put your money to work for you. But before you get in headfirst, there’s one thing you absolutely must know: how to read a stock chart.
There is a wealth of information, from past results to the current stock price, all displayed in a single chart. Both technical indications (for determining when to purchase and sell) and fundamental data (for evaluating a company’s relative health) may be found in the same chart.
The fundamentals of stock charts are consistent regardless of whether brokerage or provider is used. I’ll tell you what you have to know.
Stock Chart Types
Line, candlestick, bar, daily vs. weekly, and point-and-figure charts are some of the most prevalent forms of graphs.
The basic layout of these charts is consistent. A stock’s price is shown along the X axis, while the time at which that price was recorded is shown along the Y axis. Learn about the ins and outs of each of the most popular types of charts with the following descriptions and examples:
- Line Charts
Investors seem to favor line charts more than any other type of chart. Financial services on Google and Yahoo! both default to line charts. The X axis of the chart reflects price, as it always does, while the Y axis indicates time. The direction and past performance of a stock or other financial asset may then be seen by referencing the line drawn from the prices at various points.
- Candlestick Diagrams
In place of a continuous line depicting prices, candlestick charts use reversal patterns—red for declining prices and green for rising prices—to show price fluctuations. Both the opening and closing prices, as well as the day’s high and low, are represented by each candle.
The “body” of each candlestick shows the range of prices that a stock traded at during the trading session, while the “wicks” at each end show the highs and lows that occurred during the trading session.
- Bar Charts
While bar charts look like candlestick charts, they lack the filled-in area that would make up the candlestick’s body. Instead, the high and low are depicted at the top and bottom of each bar, while the opening and closing prices are shown by the horizontal lines in between the bars.
- Figure-and-Point Diagrams
Only point-and-figure charts deviate from the standard format of presenting opening and closing prices alongside their respective highs and lows throughout time. Instead, the market values of financial assets at the end of the trading day are highlighted by these displays.
With this method, investors can see the big picture from a supply-and-demand standpoint, rather than getting bogged down in the day-to-day fluctuations.
The only axis included on these graphs is the monetary one, as time plays no role in the presentation. A column of Xs is plotted on the chart if the stock price ends up higher than the previous closing, and a column of Os is drawn whenever the stock price ends down.
- Daily Vs. Weekly Charts
A common question among investors is whether a daily, weekly, or monthly stock chart is best for making investment decisions. Consideration of all of these factors is warranted for a number of reasons. Each can provide you with useful data:
- Daily Stock Quotes If you’ve done your homework and are ready to make a trade, the daily chart is the time frame to employ. You can decide whether it’s a good idea to purchase a stock now if it’s expected to end the day with a gain, or if it’s preferable to wait until the closing bell nears if it’s moving down in the current trading session by looking at its daily chart and determining its direction.
- Weekly and Monthly Graphs. When deciding whether or not to put money into a stock, weekly and monthly charts may be useful tools. These graphs outline larger patterns while filtering out the day-to-day fluctuations in pricing. Using these graphs can help you invest with a more level head and a greater chance of success by removing some of the emotional noise created by minute-to-minute price fluctuations.
Components of a Stock Chart
Although there are differences between the various chart types, they all provide the same basic information about a stock. This information is accessible through several parts of stock charts, such as:
Ticker Symbol, Company Name, and Exchange
Check that you’re looking at the appropriate company while viewing a chart. There are a lot of similarities between ticker symbols and corporations.
Find the firm’s complete name, the exchange the stock trades on, and the ticker symbol (which symbolizes the stock) at the top right of the chart to be sure you’re looking at the stock for the appropriate company. The graphic below shows a case in point, highlighted in red.
The “Open” label on a stock chart indicates the price at which the trading session begins.
The stock’s closing price from the previous trading session is shown by the “prior close.”
High and Low
The high and low prices for a stock during a trading session are useful indicators of the stock’s volatility since they reveal the range of prices experienced by the stock during the day.
Market extremes may also be used as a proxy for the degree of volatility in a certain deal. The range between the high and low price for a company is a good indicator of its volatility.
The market capitalisation, abbreviated as “market cap,” is an important proxy for a company’s size on the stock market. Large-cap stocks offer more steady growth but also greater risk than their smaller counterparts. Contrarily, small-cap stocks have consistently beaten their large-cap counterparts throughout time.
The market capitalization of a firm is typically not included on the price chart , but rather in the stock summary.
The P/E ratio evaluates a stock’s value relative to its earnings per share over a year. The P/E ratio is a measure of how expensive a piece of stock is relative to its earnings per share.
Payout yield measures the yearly dividend as a proportion of the stock’s current market value. If a company is now trading at $10 and has a dividend payout of $0.50 per year, the dividend yield is 5%.
52-Week High & Low
Since they correspond to the highest and lowest prices a company has seen in the past year, the 52-week high and low are significant technical levels, frequently viewed as the greatest points of resistance.
The likelihood of major movement increases once a stock breaches its 52-week high or low, signaling a continuation of the up or down trend, respectively.
Price and Volume
The stock price at any given moment, as well as its historical performance, may be shown using a stock chart. The lines on line charts, bars on bar charts, and candlesticks on candlestick charts all represent the movement of prices over time.
The volume of trades is also depicted in these charts. The stock must be actively traded if its volume is that high. That implies you won’t have any trouble selling when you want to get out of your investment. Alternatively, a stock with little trading volume may have liquidity concerns in the long run.
Technical analysis makes use of trend lines, which show the direction and strength of an uptrend or a fall in price. These lines are constructed by drawing straight lines between the stock’s all-time high and low. What a stock’s future may contain can be inferred from the patterns that emerge.
Moving Average Lines
The average price of a stock over a certain time period is represented by a moving average line. The 50-day moving average, for instance, takes an average of the stock price at the end of each trading day over the last 50 days. Moving averages are calculated by removing the oldest closing price from the calculation and adding the latest closing price to the calculation.
Stock traders should employ moving averages because they help filter out short-term fluctuations and uncover longer-term market patterns.
The present trend of Apple’s stock may be more easily understood when viewed through the lens of the 50-day moving average line, which is far less erratic.
When the stock price (shown by the blue line in the figure) crosses the 50-day moving average, traders take notice. It is a negative indicator when price drops below the moving average line. When the price breaks out above the moving average, it is considered a bullish crossing.
Line of Relative Strength
When a stock is overbought or oversold, investors and traders can use the relative strength index, or RSI, a technical indicator. When equities are overbought, they frequently need to correct down, whereas when they are oversold, they are ready to advance upward.
Adding a relative strength line to a stock chart causes a second, smaller chart to appear at the bottom of the main chart. The RSI readings are shown here.
Overbought situations are indicated by an RSI of 80 or higher, while oversold conditions are indicated by a reading of 20 or below. The accompanying figure demonstrates that Apple stock was neither overbought or oversold at the time it reached an RSI of 50 (lower right, in purple).
Moreover, the RSI reading is 57. (seen in the lower right, in black). At 12:40 on December 1, 2021, the RSI looked like this: (where the mouse was hovering on the chart). The values at different times may usually be seen when you hover the mouse over an interactive stock chart. The RSI in this case reached 57 just before profit taking became prevalent.
Levels of Support and Resistance
The technical phrases “support” and “resistance” describe the price points at which a stock is most likely to reverse course or to push through and create a significant new high or low.
In the context of a falling stock price, support is the level at which the price is most likely to reverse course and begin an upward movement. A metaphor that may help you visualize support is a floor.
A stock’s bullish run is expected to stall and turn downward once it reaches resistance, or the highest possible price the stock is likely to reach. A metaphor that helps to visualize resistance is a wall.
But these degrees of resistance and support aren’t set in stone. Technical traders frequently seek stocks that they believe will break out, or “break out,” of these ranges. Following a breakout, the stock price is likely to have a rapid and decisive price movement in either direction.
Pay close attention to the stock’s performance and the technical and fundamental information accessible through the stock chart while making investing decisions.
Stock chart reading may appear complicated at first, but once you get the hang of it, you’ll discover that you can learn a lot just by looking at the charts. This information is a vital part of the homework you need to perform before investing.