How To Read Stock Charts? – If you’re going to actively trade stocks, then you need to know how to read stock charts. Even traders who primarily use fundamental analysis to select stocks still often use technical analysis of stock price movement to determine specific buy, or entry, and sell, or exit, points.
Stock charts are freely available on websites such as Tradingview and Zerodha and stock brokerages always make
stock charts available for their clients. In short, you shouldn’t have any trouble finding stock charts to examine.
How To Read Stock Charts?
Stock Chart Construction – Lines, Bars, Candlesticks
Stock charts can vary in their construction from bar charts to candlestick charts to line charts to point and figure charts. Nearly
all stock charts give you the option to switch between the various types of charts, as well as the ability to overlay various technical indicators on a chart. You can also vary the time frame shown by a chart. While daily charts are probably the most commonly used, intraday, weekly, monthly, year-to-date (YTD), 5-year, 10-year, and complete historical lifetime of a stock are also available.
There are relative advantages and disadvantages to using different chart construction styles and to using different time frames for
analysis. What style and time frame will work best for you as an individual analyst or trader is something that you can only discover through actually doing stock chart analysis. You can glean valuable indications of probable stock price movement from stock chart analysis. You should choose the chart style that makes it easiest for you to read and analyze the chart, and trade profitably.
Looking at a Stock Chart
Below is a year-to-date daily chart of Apple Inc. (AAPL), courtesy of stockcharts.com. This chart is a candlestick chart, with white candles showing up days for the stock and red candles showing down days. In addition, this chart has several technical indicators added: a 50-period moving average and a 200-period moving average, appearing as blue and red lines on the chart; the relative strength indicator (RSI) which appears in a separate window above the main chart window; the moving average convergence divergence indicator (MACD) which appears in a separate window below the chart.
How To Read Stock Charts?
Along the bottom of the main chart window, the daily trading candle is shown. Note the large spike in volume that occurred on
, when the stock gapped higher and began a strong uptrend which lasted until early June. Also note the high amount of selling volume (indicated by red volume bars which indicate days with a greater amount of selling volume than buying volume) that
occurs when the stock moves sharply downward around June 12 th .
The Importance of Volume
Volume appears on nearly every stock chart that you’ll find. That’s because trading volume is considered a critical technical indicator by nearly every stock trader. On the chart above, in addition to showing the total level of trading volume for each day, days with greater buying volume are indicated with blue bars and days with greater selling volume are indicated with red bars.
The reason that volume is considered to be a very important technical indicator is a simple one. The vast majority of stock market buying and selling is done by large institutional traders, such as investment banks, and by fund managers, such as mutual
fund or exchange-traded fund (ETF) managers. When those investors make major purchases or sales of a stock, it creates high
trading volume, and it is that kind of major buying and selling by large investors that typically move a stock higher or lower.
How To Read Stock Charts?
Therefore, individual or other institutional traders watch volume figures for indications of major buying or selling activity by large institutions. This information can be used either to forecast a future price trend for the stock or to identify key price support and resistance levels.
In fact, many individual traders determine their buying and selling decisions almost solely based on following the identified actions of major institutional traders. They buy stocks when volume and price movement indicate that major institutions are buying, and sell or avoid buying stocks when there are indications of major institutional selling. Such a strategy works best when applied to major stocks that are generally heavily traded. It will likely be less effective when applied to stocks of small companies that are not yet on the radar screens of large institutional investors and that have relatively small trading volumes even on days when the stock is more heavily traded than usual.
Using Technical Indicators
In analyzing stock charts for stock market investing, traders use a variety of technical indicators to help them more precisely
determine probable price movement, identify trends, and anticipate market reversals from bullish trends to bearish trends
One of the most commonly used technical indicators is a moving average. The moving averages that are most frequently applied to daily stock charts are the 20-day, 50-day, and 200-day moving average. Generally speaking, as long as a shorter period moving
average is above a longer period moving average, a stock is considered to be in an overall uptrend. Conversely, if shorter term
moving averages are below longer term moving averages, then that indicates an overall downtrend.
How To Read Stock Charts?
Another commonly used indicator is the trendline. A trendline is drawn on a chart connecting the lowest price points in an uptrend or the highest price points in a downtrend. Price breaking substantially below the trendline in an uptrend indicates a possible market reversal to the downside, while price moving substantially above a downtrend line indicates a possible reversal to the upside.
The Importance of the 200-Day Moving Average
The 200-day moving average is considered by most analysts as a critical indicator on a stock chart. Traders who are bullish on a
stock want to see the stock’s price remain above the 200-day moving average. Bearish traders who are selling short a stock want
to see the stock price stay below the 200-day moving average. If a stock’s price crosses from below the 200-day moving average to above it, this is usually interpreted as a bullish market reversal. A downside cross of price from above the 200-day moving average is interpreted as a bearish indication for the stock.
The interplay between the 50-day and 200-day moving averages is also considered as a strong indicator for future price movement. When the 50-day moving average crosses from below to above the 200-day moving average this event is referred to by technical analysts as a “golden cross”. A golden cross is basically an indication that the stock is “gold”, set for substantially higher prices. On the flip side, if the 50-day moving average crosses from above to below the 200-day moving average, this is referred to by analysts as a “death cross”. You can probably figure out on your own that a “death cross” isn’t considered to bode well for a stock’s future price movement.
Trend and Momentum Indicators
There is virtually an endless list of technical indicators for traders to choose from in analyzing a chart. Experiment with various
indicators to discover the ones that work best for your particular style of trading and as applied to the specific stocks that you trade. You’ll likely find that some indicators work very well for you in forecasting price movement for some stocks but not for others.
Technical analysts often use indicators of different types in conjunction with each other. Technical indicators are classified into
two basic types: trend indicators such as moving averages, and momentum indicators such as the MACD or the average directional index (ADX). Trend indicators are used to identify the overall direction of a stock’s price, up or down, while momentum indicators gauge the strength of price movement.
Identifying Support and Resistance Levels
Stock charts can be particularly helpful in identifying support and resistance levels for stocks. Support levels are price levels where previously fresh buying has come in to support a stock’s price and turn it back to the upside. Conversely, resistance levels represent prices at which a stock has shown a tendency to fail in attempting to move higher, turning back to the downside.
Identifying support and resistance levels can be especially helpful in trading a stock that tends to trade within an established trading range over a long period of time. Some stock traders, having identified such a stock, will look to buy the stock at support levels and sell it at resistance levels over and over again, making more and more money as the stock traverses the same ground multiple times.
For stocks that have well-identified support and resistance levels, price breakouts beyond either of those levels can be important
indicators of future price movement. For example, if a stock has previously failed to break above $50 a share, but then finally does so, this may be a sign that the stock will move from there to a substantially higher price level.
The chart of General Electric (GE) below shows that the stock traded in a tight range between $29 and $30 a share for several
months, but once the stock price broke below the $29 support level, it continued to fall substantially lower.
Conclusion – Using Stock Chart Analysis
Stock chart analysis is not infallible, not even in the hands of the most expert technical analyst. If it were, every stock investor would be a multi-millionaire. However, learning to read a stock chart will definitely help turn the odds of being a successful stock market trader in your favor.
Stock chart analysis is a skill, and like any other skill, one only becomes an expert at it through practice. The good news is that
virtually anyone willing to work diligently at analyzing stock charts can become, if not an outright expert, at least pretty good at it – good enough to improve their overall profitability in stock market trading. Therefore, it’s in your best interest as a trader to begin, or continue, your education in stock chart analysis.
Hope You Like This Blog And For More Blog Like This Please Follow My Site And For More Blog Please Click Here