Before investing, learn how to read a stock chart to see how the price of a share has changed over time. It’ll help you make a good decision.
What’s a stock chart?
Learning how to read stock charts is essential for picking stocks to buy or sell. It won’t tell you which one to buy. Instead, a stock chart tells you whether it’s a good time to buy, sell, or hold a stock.
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It can be intimidating at first. Once you understand the key aspects, you’ll be a confident investor.
A stock chart provides the following information about the stock of a company:
- Ticker symbol.
- Price changes.
- Price history.
- 52-week high and low.
- Trading volume.
- Price-to-earnings ratio (P/E ratio).
It provides important information to help you make an educated decision on what to do. It’s also a great way to assess the potential performance of a stock.
Types of stock charts
There are many types of stock charts for analyzing a stock. The following are the most popular and widely used charts.
Line charts are the most common type of stock chart. It uses one continuous line to show changes in a stock’s closing price over time.
The closing price is the last price that a particular stock was traded at during a regular trading session.
You can track the price of stock’s throughout the day with a line chart. However, the most common way is to track the closing prices of each day over several months or years.
Tracking the closing price gives you clarity. It doesn’t include other information, such as the opening price and changes to the price throughout the day.
Too much information can make the decision-making process complicated and exhausting. It can lead to no decision at all.
If you’re new to investing, line charts are the easiest to read, and you can use them to make informed decisions.
They’re also widely available. Google Finance and Yahoo! Finance show line charts on their sites.
Candlestick charts are also known as Japanese candlestick charts because it was created by Homma Munehisa in Osaka, Japan.
Each candlestick represents one day. It shows the opening price, high, low, and closing price. It’s also typically color-coordinated.
If the candlestick is red or filled-in, that means the opening price was higher than the closing price. It shows that the stock moved down on a particular day.
If the candlestick is green or outlined, the stock’s closing price was higher than the opening price. It shows that the stock moved up that day.
The wicks are another important aspect of a candlestick chart. The upper wick shows the highest price of the day, and the lower wick shows the lowest price.
The wicks show how the price of a stock has fluctuated compared to the opening and closing price.
Candlestick charts are popular because they provide more information than a line chart. It also puts everything in an easy-to-read way.
Bar charts are similar to candlestick charts because they show the same information. However, the way they show it is different.
In a stock bar chart, each bar represents a day. The two ways to display information are as follows:
- Open price, high, low, and close price (OHLC).
- High, low, and close price (HLC).
A bar is comprised of a vertical line and two horizontal lines. The vertical line represents the range between the highest and lowest prices.
The horizontal line pointing to the left represents the opening price, and the one pointing to the right is the closing price.
Typically, bar charts are color-coded. A green bar means the price closed higher than the opening price. A red bar means the price closed lower than the opening price.
How to read it
To read and understand a stock chart, take the following steps.
1. Identify trendlines
Trendlines are easy to recognize, and they tell you the overall direction of a stock. It connects two or more price points to form a line.
Although there are no guarantees with the direction a stock price will go, trendlines show you the way it’s changed over time and help you make an informed prediction.
There are two trends to focus on, uptrends and downtrends. If you connect several low points in a stock chart and the line’s moving up, it’s an uptrend. If you connect the high points and the line’s pointing down, it’s a downtrend.
2. Trading volume
Trading volume is another important aspect of a stock chart. Price and volume go hand-in-hand because you need to understand both to make an informed decision.
At the bottom of a stock chart, there are vertical lines that represent the trading volume over a set period.
In many cases, higher trading volume leads to higher stock prices. The reverse can also be true.
Although there’s not always a correlation between trading volume and stock price, it helps you understand the activity of a stock.
The benefit of high trading volumes is that you can buy or sell stocks quickly because there’s a lot of activity.
When you’re looking at trading volume, look for spikes. A spike in volume can occur if there’s news about a company or industry, which can be good or bad.
If the volume is higher than normal and the stock price is decreasing, it means that there are more shares for sale than buyers. It’s a sign of a downward trend. The same is true for the opposite.
3. Support and resistance
Talk to any stock trader about analyzing a stock, and you’ll hear about support and resistance. It’s used to predict the price movement and find points to buy or sell a stock.
Support and resistance are lines that you can draw on a stock chart. The line of resistance is at the top while the line of support is at the bottom.
The resistance line marks a price that doesn’t normally trade above. The support line marks a price that the stock doesn’t normally trade below.
The price of a stock will go up and down within the support and resistance lines.
If the price increases above the resistance line, the previous resistance line becomes the new support line. The opposite is true, as well.
The main purpose of identifying lines of support and resistance is to predict when a stock price may increase or decrease.
Stock charts are important to analyze because the right methods will help you decide on whether to buy, sell, or hold a stock. If you’re new to investing, use the techniques you learned to practice analyzing stocks.
Featured image courtesy of Pexels.
About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.