Learning how to read stock charts can feel similar to learning how to drive a car. It can be baffling at first, but once you learn the basics, including types of stock market charts, and the patterns they’re forecasting, you’ll hopefully get the hang of it.
With that in mind, learning how to read stock charts is a bit of a heavy lift, and can be difficult or intimidating for newer investors. Keep that in mind: It’ll take some time and practice before you feel comfortable! But the sooner you learn to decipher stock charts, the more useful that knowledge will be in your investment strategy.
The Art of Reading Stock Charts
Learning how to read stock charts can feel like you’re training in some sort of higher art. But again, with some practice, many investors can learn to do it and implement it into their investment strategy.
Understanding Chart Types
There are a handful of basic stock chart types, including line charts, bar charts, and candlestick charts. Thankfully, these charts are more or less exactly what they sound like.
For instance, line charts simply graph a financial security’s historical performance with a line, allowing investors to see the ups and downs over time. A candlestick chart, on the other hand, shows a stock’s high, low, opening, and closing prices for a specific time period. Bar charts also show a security’s price change over time, but there are some slight differences between bar charts and candlestick charts – often, bar charts aren’t color-coded, for example.
Decoding Stock Chart Data
Stock charts are relaying a lot of information about a stock’s performance over certain time periods. Taking that all into account can be difficult, but the main data points investors will want to try and utilize to guide their investment decisions involve prices, dates, and trading volume.
Before you proceed any further, though, you’ll want to make sure you know what stock symbols are.
Stock symbols, or tickers, are the series of letters, and sometimes numbers, by which a particular stock is uniquely identified. For example, the stock symbol for Apple is AAPL, and the stock symbol for Amazon is AMZN. Stock symbols are defined by the exchanges on which those stocks are traded — for instance, the New York Stock Exchange (NYSE) or the Nasdaq. These are the markets on which stocks and other assets are bought and sold. Stocks traded on the NYSE and Nasdaq can have tickers up to 5-letters long, but most are only 2-4.
With that in mind, using graphs and charts to figure out what’s happening in the stock market is the next step.
The first thing you’ll notice when looking at the chart itself is that it’s pretty much a line graph. Remember middle school math? You’re dealing with a basic X and Y axis—and the X axis refers to time.
On a stock line chart, the trend line is measuring the asset’s performance over that period of time. Investors might want to view the stock’s performance over a single day, week, or month, or see its long-run trend line over the past year or longer. It all depends on your personal trading goals.
Some stock charts may spell out the stock’s opening price, low price, high price, and closing price during a given time period, usually marked simply O, L, H, and C. Here’s what those figures each refer to:
• The opening price is the first price at which the stock traded during the given time period.
• The low price is the lowest price at which the stock sold during the given time period.
• The high price is the highest price at which that stock sold during the given time period.
• Finally, the closing price is the last price at which the stock sold before the exchange closed.
If the exchange is still open and the stock is being actively traded, the stock chart will likely display the last price, which is just what it sounds like: the last price at which the stock was successfully sold.
You might also see the change in that price from the one immediately before it, or last change, usually displayed as both a dollar value and a percentage.
For example, if you were looking at a chart for Company X (using a fictitious stock ticker, CMPNYX) stock, it might display the following string of letters and numbers:
CMPNYX 197.16 +0.05 (+0.04%)
In this example, CMPNYX is the ticker symbol, and $197.16 is the last recorded price of a single share sold on the exchange. That price was five cents higher than the trade immediately before it, meaning the value of the stock rose, in that time, by 0.04%.
By looking at how the trend line moves over the chart period, you can get a sense of the stock’s price and performance over time as well as its most recent statistics.
Volume corresponds to how many shares are bought and sold within a specific time period. In other words, it’s a measure of supply and demand. Volume is often represented as a series of bars running along the bottom axis of the chart. The bars’ size aligns with the number of trades made during that time period, and can be useful for guesstimating upcoming sales trends for that asset.
It’s not a perfect science, of course, but if a stock is trading at low volume — i.e., few shares are being bought and sold each day — it may indicate that the current price trend is about to change. Perhaps the stock is in poor demand because it’s valued too highly for the market. It could also just mean the investment is out of favor with investors.
On the other hand, a high trade volume might indicate that you’ll have an easier time selling the stock quickly if you’re considering short-term trading.
The Role of Technical Indicators
Investors and traders can use a variety of technical indicators to try and make sense of the market, too. That can include things like the 200-day moving average, which attempts to focus on overall pricing trends for a specific stock, or a variety of other trend and momentum indicators.
There are many technical indicators that investors can use to their advantage. It may be worth taking the time to learn more about each, and decide whether to fold them into your strategy.
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Technical vs. Fundamental Analysis
We’ve discussed technical analysis, but fundamental analysis is another important element to introduce into the mix. Chart-reading, though, does rely heavily on technical analysis. For that reason, it may be worth revisiting some of the core reasons that investors will want to bone up on the subject.
The Case for Technical Analysis
Fundamental analysis focuses on a company’s underlying performance, whereas technical analysis is more focused on a stock’s performance. While there may be drawbacks to technical analysis, technical indicators are the type that will reveal patterns in stock charts that can be used to make investment decisions. While the buy or sell signals those patterns relay may or may not be faulty, those indicators are what investors are going to want to use when reading stock charts.
When Fundamentals Intersect with Charts
As mentioned, fundamental analysis concerns a company’s financial and operational health, more so than deciphering lines on a chart. Fundamental analysis involves looking at indicators such as earnings per share, price-to-earnings ratios, and return on equity, which can have an effect on how investors decide to buy, sell, or hold a stock. That, naturally, can dictate what a stock’s performance looks like on a chart – which is where it intersects with technical indicators, in many respects.
Essential Stock Chart Knowledge
When it comes down to it, investors may be best served by garnering essential stock chart knowledge involving the various styles of stock charts, their uses, and the language, or key terms, used to describe what those charts are displaying.
Stock Chart Styles and Their Uses
As mentioned, there are a few main types of stock charts: line charts, bar charts, and candlestick charts (there may be others, but we’ll stick with a few basic ones). Each shows the performance of a specific stock, albeit in different ways. Learning what those charts show, how they show it, and how to translate that information into action is ultimately what investors should aim to do when learning how to read stock charts.
Key Terms Every Trader Should Know
There are also a number of key terms that traders should know. The list can be lengthy, but should probably include words and phrases such as market capitalization (as discussed), price-to-earnings ratios, dividend yields, options, assets, and many more. You should become more familiar with them as you move through your investing journey – you’ll likely start using many of them yourself as your trading activity and strategies become more sophisticated, too.
Applying Your Stock Chart Skills
At the end of the day, learning how to read stock charts, for most investors, is all about one thing: applying that knowledge and making better-informed investing decisions.
How to Use Charts for Smarter Investing
There’s really no limit to the way that investors or traders can use charts to make smarter decisions. The more time you spend studying charts and learning what they show or say, the more information you’ll end up having at your disposal with which to make a decision. The issue, of course, is that all of that information still can’t tell you in all certainty what a stock’s value is going to do next.
That’s perhaps the most important thing to remember about stock charts: they are not a crystal ball, and there’s no guarantee that investors will achieve the outcomes they were hoping or planning for.
Can Charts Enhance Your Investment Strategy?
Stock charts can enhance your investment strategy by adding a whole new dimension – and pile of data and information about specific stocks – to your tool kit. But again, you can spend hours looking at charts, and that still doesn’t mean that a position or investment won’t blow up in your face. You may think of it this way – all investing involves a level of risk, but learning to use stock charts as a part of your strategy may help you gauge how big those risks are, and in some cases, avoid particularly risky investments.
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