Learning how to read stock charts is an art in itself.
The stock charts are practically everywhere.
You switch on the television or open a stock magazine; these charts are practically everywhere.
You want to read the stock charts, but the problem is way too much data.
Often the sheer inflow of raw data can be overwhelming for new users.
Without understanding how to read stock charts, we often rely on experts to guide us.
But the fact is they rely on these stock charts to guide you.
So, all the information that you need is stored right here.
The good news is you can actually be on top of the charts.
Investment in stock markets is all about application and practice.
It is essentially about how you can use the market forces to seal your profit.
But the problem is most of us start investing with no real understanding as such.
This is the reason that there is a severe need for skill up gradation as we progress in trading.
How to read stock charts properly is more about experience and diligence in trade.
This is the key factor that differentiates a novice from a professional.
It empowers you to make informed choices in terms of boosting your investment.
That will then help boost the profit margin to a large extent.
Tracking the stocks and the charts closely ensure that no one can mislead you regarding markets.
You can analyze the stock movement and take a call on the risk involved.
This is one concept that can provide better value to the investor.
They are able to identify trends and long-term call based on a meaningful evaluation.
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What Is a Stock Chart?
Before you learn how to read a stock chart, it is important to understand what is a stock chart?
Very simply put, it is a graph that etches out the stock’s movement.
It is plotted using price points at which the stock is trading at a certain level.
A typical stock chart has an X-axis, Y-axis, time duration.
So technically, this is a regular chart that you learned plotting at the high school.
What is interesting is the time period that is used for charting this.
It can be charted on daily basis or a weekly basis.
You can even have charts spanning over months, years and sometimes even from the time the stock started trading.
You get to know key elements about the highest price the stock ever traded.
This may also vary depending on the time period you chose.
Similarly, even for the lows that the stock hit, these charts are very easy reference points.
This is perhaps the basics when you set out to read stock charts in a comprehensive way.
Apart from tracking the regular opening and closing rates, you also get an idea about the tentative range that a stock operates in.
The stock chart may be plotted differently for different purposes.
On an average, you have
1. Line Chart
Gives a clear picture of the overall stock price movement and how the stock is panning out.
2. Bar Chart
This helps you to identify the prevailing trend and also time your entry and exit.
Candlesticks are visually appealing and invariably very convenient to interpret.
Your final analysis is generally a sum of these elements in harmony.
The idea is to master them individually and together.
How to Read Stock Charts
But there is a huge sea of information, and the question is what should you read and how?
The most critical information in your stock chart is undeniably the state of the stock.
What do the prices indicate, how are they poised and what is the trend direction?
This is undeniably one of the most important information that you can get from the charts.
It is most important to understand whether the price you are buying the stock is appropriate?
You can get it higher or lower going forward.
But as long as you can identify a broad trend, you can also create standard risk assumption.
It will tell you whether the stock is in between, middle or end of trend.
That is an important premise to base your judgment upon.
The next important factor to read is how strong is the trend?
As an investor, you must probe if this is a momentary blip or a long-term trend.
That alone will help you make a convincing call about the future.
The trend lines are crucial indicators for a fair assessment.
It gives you an idea about the wave that the specific stock is in.
Based on these charts, you can also calculate moving averages.
The support and the resistance levels are also very clearly etched out on the stock chart.
All of these numbers are again important indicators.
They tell you if a rally is in the offing and if the chart will break out any time soon?
The charts will also show the general market sentiment on the stock at this point.
All of these are important factors in learning how to read stock charts properly.
They help you proceed in step by step format to understand the nuances of trade comprehensively.
1. Analyzing Price & Volume in Stock Chart
When you learn how to read stock charts, price and volume are some of the basic parameters that you master.
You must remember that different types of charts display different information.
But one basic factor is constant about all charts.
They all highlight price and volume movement.
So whether you have a bar chart or a line chart or Candlestick, it is hard to miss this one.
Every stock chart will demonstrate the price and volume movement at a given instance.
The price history is perhaps one of the biggest constants across the stock chart.
Depending on the period the chart is plotted, you have a fair idea of the price movement and volumes involved in the trade.
Let us take the example of a daily chart first.
So here you will have the price points the stock hit on a given day, from the start of trade till the end.
But when you see the weekly chart of the same stock, it is computed on a weekly basis.
Perhaps that is why this one will have the closing rates of each day.
In other words, it highlights the weekly assessment of prices.
So if you have sharp ups and downs in price movement, you have pronounced peaks.
At the same time, if the price movement is range-bound, you will see the stock price plateauing at that point.
The next is the volume of stocks that are traded.
For every time period that the chart is computed, you will see this bit highlighted.
You will see the kind of volume that has been traded for a specific period.
This will often give you hints about the distinctive interest and trend.
Therefore, both these factors offer crucial information about the broad trend in the market.
2. Dealing with Moving Averages
These are primarily plotted to ease out volatility and provide a definitive trend for the stocks.
They offer a direction in which the stock is moving.
They also provide an appropriate context for the overall price and stock movement.
Any potential divergences then become more straightforward to spot.
You can easily identify any possible aberration from the normal trend.
One of the most common and talked after moving average is the 50-day Moving average.
This is undeniably one that is followed most extensively.
It offers the price movement of a stock over a 50-day period.
So you easily get the average price over the 50 trading sessions.
Another widely followed benchmark is the 200-day moving average.
In this, the stock’s movement is traced over 200 days and then the average price is calculated.
Well, I am sure; you understand that this is the average price over 200 days or 50 days.
But the question is how this information helps me to read stock charts?
More importantly, how do I interpret this information to my advantage?
Well, you see that most financial investors prefer to see the moving averages trend up.
Another factor is that they prefer the stock price closer to the trailing average.
They consider that these two are vital signals indicating that the stock is trading in the right direction.
In case you are looking for value buys, experts will tell you that you must look for stocks that are trading below the moving average.
They hope that they are picking the stock at a discount and it will soon catch up with the key averages.
The volume during this period too plays a crucial role in determining stock value.
3. Interpreting Support and Resistance Levels
Apart from the volume and averages, there are some other key levels too.
It is important to analyze these levels in the stock chart as well.
Normally these levels are crucial in determining the entry and exit points in a stock.
You have understood fairly well that charting stock price is all about creating price points.
Certain prices offer reasonably good entry points.
On the other hand, the price may offer good levels to book profit.
Again I am sure you have heard about the psychologically important levels.
Often when the stocks breach these points, they are said to embark on a new trend.
These levels are often referred to as the support and resistance levels.
On the stock charts, you can see them as troughs or peaks.
You will notice that the stocks tend to drop around certain levels and then they rebound.
Support refers to the lower price from which they rebound.
In many ways, these become a floor of sorts for the stock price.
Similarly, there are points till which a stock rises, but they are not able to go beyond that.
They repeatedly face resistance at the price zone.
As a result, that level is popularly referred to as the resistance zone.
As a result, the support and resistance levels are key price points to watch.
When the stock breaks through any of the two levels, it is indicative of a new trend.
You see stocks embarking on a renewed uptrend when they break a resistance zone.
Similarly dropping below support levels may be worrying and this may lead to renewed selling.
Therefore, both these price points help determine your stance on a given investment.
Depending on what level it has cracked, you can take a call on future action.
4. Identifying Dividend & Stock Split Trends
When you are learning how to read stock charts, remember they don’t just point to price moves.
The charts almost invariably also point to every small and big development in the stock.
Therefore, they also highlight significant movement in the stock price around this development.
Normally a stock split and dividend issue is a fairly important event for the stock.
Most stock charts record this event towards the bottom of the graph.
A dividend is a small share of the profit that the company decided to share with you.
This will also depend on the exact amount of stocks that you own.
So when you read the stock charts carefully, you will be able to note down all these development thus far
Often this historical record will also offer you key inputs about future movement.
So, in a way, this chart helps you understand the individual stock movement at certain specific points.
This may also offer an interesting insight into future stock movement.
The stock split is another such development.
This is essentially a board decision that allows more share offering to the public.
But at the same time, it is important to take note of the share value at these points.
Remember the core value of the company may not change but the share price will.
Often a share split encourages more investors to buy the stock.
So, the charts will showcase a definitive uptick.
So, at certain times, the stock split leads to increased demand.
That always has a bearing on the overall stock price.
It will, no doubt, be impacted by any change in demand.
The core idea is to carefully observe the stock movement at all such points and tally the critical price points.
This will help in identifying important price points.
Why Is It Important to Analyze Stock Charts?
Now we do understand that a stock chart reveals crucial data.
But do we need all that data in our day to day trading?
More importantly, how can that data help us in getting an edge in our investment?
Well, to understand this element, you need a broad understanding of how the market works.
The average retail investor like you and me form a minuscule part of the entire trading shenanigans.
Fund managers and big institutions actually undertake almost 80% of the net trading activity.
Most of the stock movement that you see is the outcome of the variety of stock calls that they take.
Most of the price movement is the outcome of the buying and selling that they undertake.
So as a retail individual investor, you have to merely be part of the trend.
You have to watch out for your long-term goals and ensure that you can realize a relative amount of profitability.
This is where the stock charts will help you achieve this goal.
Learning how to read the stock charts properly will ensure that you are able to identify the trend quickly.
You can then use this information effectively to preserve your profit.
Remember your relative stake in the market is much lower than these fund managers.
Your trading call will not impact the market.
But these charts will help you safeguard your investments from becoming prey to aggressive selling or euphoric buying.
Therefore, retail investors like you and me need the stock charts to make informed choices.
Buying stocks and tracking charts is not just about identifying key price points.
You have to apprehend the trend appropriately and create meaningful investment positions.
In this regard, learning how to read the stock charts properly can help you to a large extent.
Knowledge is power and knowing how to read stock charts will help you wield that power.