One glance at a stock chart might seem daunting. However, once you learn how to read stock charts, you will find it to be second nature. The nice thing about stock charts is you don’t need a finance degree to analyze it. With enough practice, you will be able to understand it easily so that you can use it to making your trading decisions.
A price chart is a series of prices plotted over a specific time period. There are many different types of stock charts, such as bar, line, OHLC (open-high-low-close), candlestick, point-and-figure and more. They can all be viewed in different time frames, whether it’s intraday, daily, weekly or monthly. Each type of stock chart displays various kinds of information and has its own advantages and disadvantages, but they all reveal valuable price and volume information.
A stock chart looks like a regular graph, where the price is plotted on the y-axis, or vertical axis, and the time is plotted on the x-axis, or horizontal axis.
Types of Stock Charts
Below are the most popular stock charts:
One of the most popular charting methods is the OHLC chart, where the high, low, close and open prices are needed to form each price bar. The length of each vertical bar shows a stock’s trading range for that time period. The top of the bar shows the highest price the stock was purchased for during that period, and the bottom of the bar shows the lowest price the stock was purchased for. A short horizontal line to the right side shows the closing price while a line to the left side shows the opening price.
It is also important to know the stock chart’s time frame and the time that each price bar represents. On a daily stock chart, each price bar represents the high, low, open, and close prices of the security during that day. On a monthly chart, each price bar represents the prices the security traded during that month.
Line charts only show only the close of the day and do not show the open, high, and the low data points. Some traders think that the closing price is the most important. Line charts show less clutter, however they do not provide as much detail as the other charts.
Candlestick charts show the open, high, low, and close prices. Many traders like this type of chart because its contrasting colors provide fast visual interpretations. The open and close prices are represented by horizontal lines and they form a box, called the body. White candles form when the close price is higher than the open price and black candles form when the open price is higher than the close price. The lines extending from the body are called shadows and represent the high and low.
How to Read a Stock Chart
Stock Chart Analysis
When you look at a stock chart, there are several questions that you should ask yourself. First, identify whether the stock is an uptrend or downtrend. If a stock is heading upwards toward the right corner of the chart, then the stock is in an uptrend. Likewise, if the stock is heading downwards, then the stock is in a downtrend.
Next, identify if there is a level of support or resistance. A support level is when the stock cannot drop past a certain price level and a resistance level is when the stock cannot break through a certain price level. The below chart shows Apple’s stock trading in a trading channel, which is the space between an asset’s support and resistance levels. The price stays within these levels until a breakout occurs.
The vertical lines at the bottom of stock charts show the stock’s volume, or the number of shares traded during the specific time frame of the chart. A trading signal with high volume enhances that signal. For example, the stock finally broke out through that resistance level on February 1 on high volume. This high volume means that the buying interest is strong and that an uptrend is likely to occur. As you can see, the price is trended upwards toward the right corner of the chart for the next two months.
Some traders might make multiple trades when a stock is in a trading channel, buying when the price gets to the bottom of the channel and selling when the prices gets close to the top of the channel. This trading strategy is known as range-bound trading. By finding major support and resistance levels, traders can make profits on the price spread. They repeat this process of buying at support and selling at resistance until the stock breaks out from the channel.
Why do we study stock charts?
Technical analysts, or technicians, study stock charts to analyze price information and forecast future price movements. Knowing how to read a stock chart is a great advantage because they provide an easy-to-read illustration of a security’s price movement over a specific time frame and can help you make better trading decisions.
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