You can find stock charts on many online platforms, such as Google and Yahoo Finance.
They might seem like useless visuals at first. However, you’ll understand their significance if you know how to read stock charts. They can provide a clear picture of one asset’s performance based on its historical value.
This quick guide will teach you the ins and outs of stock charts. Aside from its construction, we’ll also discuss the basics of using technical indicators and analyzing trends.
Stock Chart Construction: Lines, Bars, and Candlesticks
In learning how to read stock market charts, one thing you must know is that they vary in terms of construction. The latter is their visual representation. You can switch from one type to another to reveal more information about a specific stock.
A line chart visualizes longer-time trends. It shows the stock’s past and closing prices for a specific period. The x-axis shows the timeframe.
On the other hand, a bar chart provides four important details: open, high, low, and close. They represent stock prices at specific times.
Lastly, a candlestick chart shows buying and selling pressure. Knowing how to read a candle stick lets you analyze trade patterns and price movements. Further, it’s a way to know if the closing price is lower or higher than the opening price.
How to Look at Stock Charts
It all depends on the type of stock chart you’re looking at. There can be slight differences, but they can all provide crucial insights to make better trading decisions.
For example, let’s discuss how to read candle stick charts simply by looking at them. One of the first things to look at is the body. A longer body means there is more price movement within a time.
On the other hand, a shorter body shows that the opening and closing prices are almost the same.
Meanwhile, you must also look at the wick’s size. If there’s no wick, or it’s a short wick, the closing price action is strong. Therefore, the buyers (green candlestick) or sellers (red candlestick) have control of the period. Meanwhile, a longer wick means there’s a large price trading range.
Basic Volume Patterns when Reading Stock Charts
When reading stock charts, you must also know the basic volume patterns. There are four things to look at:
- High-Volume Trading During Up Days: It can indicate a bullish market with the stock price continuously rising.
- Low-Volume Trading During Down Days: Another bullish indication showing that not many investors are trading.
- High-Volume Trading During Down Days: A bearish indicator wherein institutional traders are aggressively selling.
- Low-Volume Trading during Up Days: It’s another bullish indicator, but not as strong as high-volume trading during down days.
How to Use Technical Indicators when Reading Stock Charts
The technical indicators allow investors to predict market movements. For instance, it provides insights into potential price movements and market reversals. It’s useful for identifying reversals from a bullish to a bearish market or vice versa.
While various technical indicators exist, a moving average is the most useful. It determines the trend direction. To calculate, you’ll add data points within a period and divide them by the number of periods. Further, it’s useful in evaluating trade signals, so you’ll know your next move.
How to Analyze Trends
Trend analysis is a critical element in reading stock charts. One that you can analyze is the time at which a trend occurs. Be on the lookout if it’s been too long that the stock has been going in one direction. It can be a sign that a reversal is about to happen.
More so, you must watch out for how stocks trade. Some stocks can have slow movements. Meanwhile, others can be more volatile. If there’s high volatility, don’t put too much weight on daily trading action.