As a beginning investor, one of the most important things you can do is to learn how to read stock charts. These charts act like a road map for investors, exposing past performance and current trends about how companies are performing and whether a stock’s price makes it an attractive buying option.
Keep reading this primer on how to read stock charts to learn the basics of charting and other technical indicators to keep in mind as you continue your journey to financial independence.
What Are Stock Charts?
A stock chart is a visual indicator that provides a variety of data about a stock or fund, including its price plotted over a specific period of time.
Stock charts are used to conduct technical analysis on investments. Investors can use charts for individual stocks, exchange-traded funds (ETFs), mutual funds, index funds, and other securities. By analyzing a chart’s trend line, trading volume, volatility, and the number of shares outstanding, you can understand how a particular investment is performing over time and determine its support level, enabling you to make an informed decision about whether a certain security is right for you.
Why Investors Read Stock Charts
Why do investors read stock charts throughout the day? Let’s take a look.
Make Informed Decisions
Stock charts provide a variety of data points to help make a quantitative decision about a company’s overall performance. Of course, it’s always a good idea to conduct further research and take qualitative factors into consideration too before investing — like a company’s leadership structure, product offerings, and corporate social responsibility initiatives.
A stock chart can serve as a quick indicator as to whether a company is worth a closer look.
Time the Market
In addition to understanding a company’s financial performance, it’s also necessary to make timely decisions. Reading stock charts can help you visualize how a stock is performing on an intraday basis, giving you the insight you need to buy shares at a lower price before the stock increases in value.
Keep in mind that timing the market is a tall order. While stock charts can help you make informed decisions, they won’t turn you into an oracle.
Avoid Getting Manipulated
There is a lot of misinformation circulating about stocks online. The only way to avoid being manipulated is to look closely at data and make decisions based on that information.
How to Read Stock Charts
Now that you have a basic understanding as to why you should use stock charts, let’s take a closer look at the basic elements of them.
Charts can be broken down into different time periods. For example, you may want to view how a stock has performed over the last five years, or you might be more interested in how it’s performed over the last week.
A stock chart contains the official symbol of the stock and the exchange that it’s traded on. The stock symbol is very important to get right when you go to make a trade using a brokerage. There’s a big difference between buying APL, AAP, and AAPL, for example.
Often, companies have multiple stock offerings with similar symbols, which can make things confusing for new investors.
The open price is the price of a stock at the start of the trading day when the market opens at 9:30 a.m. Eastern Time. For example, a stock may start the day trading at $36 per share, and the price of the stock will fluctuate throughout the trading day.
This indicates the stock’s overall price at the end of the trading day. The stock market typically closes at 4 p.m. Eastern Time except during half-day sessions, which are typically on days preceding holidays.
The high price indicates the stock’s highest trading price during the chart’s forecast period.
The low is the stock’s lowest trading price during the forecasted period.
The previous close figure indicates the stock’s close price from the previous closing day. This is useful for running a quick day-to-day performance comparison.
52 Week High
This indicates the stock’s highest trading price over the previous 52-week period.
52 Week Low
The 52-week low is the lowest trading price over that period of time. The high and low numbers can help you determine whether a particular stock makes sense to buy based on its performance over the last year.
The dividend yield is a ratio that indicates how much a company pays in dividends annually relative to its stock price.
Market cap indicates the total value of all a company’s shares of stock.
Price-to-Earnings Ratio (P/E Ratio)
The P/E ratio is the ratio for determining the market value of a stock compared to the company’s earnings.
Types of Charts
As you start getting into charting, here are the most common charts you’ll likely come across.
Bar charts contain high, low, opening price and closing price for specific intervals, which are determined by the trader. Intervals can be related to a period of time or another indicator like the number of transactions (e.g., you might be curious about high volume days). A bar chart that shows transactions is called a tick chart.
Often, bar charts show whether a price is moving up or down. Traders who make decisions based on price bars are referred to as price action traders.
A candlestick chart is a price chart that’s also used to indicate high, low, open, and closing prices for a certain time period. The chart uses colors to show how the stock’s price is moving. It’s commonly deployed to visualize the short-term price movement of a particular security.
In a candlestick chart, the highest wick shows the highest price for that period while the lowest wick shows the lowest price. A green candlestick is used to indicate a bullish uptrend, while a red candlestick indicates a bearish downtrend.
One of the downsides about candlestick charts is they contain a lot of noise. To filter out noise, traders sometimes use Renko charts which are built around price movement instead of price and standardized time intervals. Bricks are added to the chart when price moves, with blocks positioned at 45-degree angles.
One of the most common types of stock trading charts that you will come across is a line chart. Line charts contain points based on data between closing prices.
Line charts are often used in financial reports to show price movement. However, they typically lack granular insight and should only be used as one indicator of a stock’s overall performance. Use line charts to view daily price changes — not to determine your investment strategy or what should be in your portfolio.
Common Chart Patterns
Let’s take a look at some of the common chart patterns that you should look for when conducting a technical analysis.
A wedge shows price movement across resistance and supporting lines. A wedge can be either rising or falling.
As the name suggests, a pennant is a trend that has two lines that converge together. Pennants form after significant downward or upward movements.
In a flag pattern, the resistance and support lines run side by side until a breakout occurs. Flag patterns are associated with strong uptrends.
A double top pattern has an M shape and indicates a bearish reversal trend.
The opposite of a double top pattern is a double bottom trend, which looks like a W. A double bottom pattern indicates bullish price movement.
Head and Shoulders
A head and shoulders pattern is a price pattern that traders use to identify when a reversal is taking place after an uptrend has run its course. The opposite, an inverse head and shoulders pattern, takes place after a downtrend.
Cup and Handle
A cup and handle pattern is a bullish continuation pattern indicating a consolidation period at the end of a breakout.
Rounding bottom patterns happen after extended downturn trends. When a rounding bottom pattern occurs, it indicates a reversal in long-term price movement.
Where to Find Stock Charts
Thanks to the internet, there is no shortage of stock charts available to investors. What follows are just some of the many places where you can find stock charts online.
Google is an excellent place to conduct a quick analysis of a particular stock. You can access an abundance of line charts simply by searching for a company’s name. For example, you may look for “Costco stock price.” If you know the ticker, you can search for it directly (e.g., TSLA). A line graph will appear along with a variety of data points.
TradingView is a social network for traders and investors. The company offers live quotes and stock charts along with expert trading tips.
Yahoo! Finance is an excellent source for free stock charts. The company offers free real-time quotes for NYSE and NASDAQ listed stocks. These charts are interactive and have more than 100 indicators.
Another service to consider is StockClock, a stock screener that contains a variety of market data and news updates for iOS and Android devices. You can use their user-friendly interface to monitor daily market news and track price movements via candlestick charts.
Accessing Stock Charts Through Brokers
One of the great parts about using an online broker like Schwab or Fidelity is that they provide you with a variety of charts you can leverage to make informed decisions. Using charts offered by brokers can prevent you from having to search around the internet for other services.
Frequently Asked Questions
What are penny stocks?
A penny stock is a common stock that’s valued at less than one dollar. This type of stock is considered high-risk due to their low price and lack of liquidity.
Some people are attracted to penny stocks because you can buy a large number of shares without having to spend much money. But, just because you might have a lot of shares doesn’t mean you have a good investment.
While it’s possible to make money in penny stocks, you’d be wise to avoid going this direction to begin with.
What is a moving average?
A moving average is a technical analysis tool that creates a constantly updated average price over a specific time period (e.g., 50 days or 100 days). This type of tool is used to smooth out price data to see how a stock is performing over time and determine whether it’s likely to increase or decrease in value.
What is a ticker symbol?
A ticker symbol is an arrangement of characters that’s used to indicate a security on a stock exchange. Some common examples include T (AT&T), MSFT (Microsoft), and HD (Home Depot).
How do resistance levels work?
A resistance level shows an upper price level for a commodity or security that is reached but not surpassed in the market.
For example, a share price may continuously reach $39 but not exceed $40 — indicating the limit to which investors are willing to trade that security.
How many indexes are there?
There are roughly 5,000 U.S. stock indexes. The most popular indexes in the U.S. include the Dow Jones Industrial Average (the Dow), the Standard & Poor 500 (S&P 500), and the Nasdaq Composite.
Indexes are based on different listings. For example, the S&P 500 follows the 500 largest U.S. publicly traded companies. The Nasdaq Composite tracks more than 3,300 stocks found mainly on the Nasdaq stock market.
Do I have to use a brokerage to invest in stocks?
Buying stocks isn’t like going to a store for a regular product. You have to use a brokerage firm to purchase stocks online.
If you do not want to use a broker, you are going to have to use a direct stock purchase plan through a transfer agent. If you’re like most investors, this is an unnecessarily complicated approach, and you’d be better off setting up shop on a site like Schwab or Fidelity instead.
What is a daily chart?
A daily chart is a type of chart that’s used to indicate a security’s price action during a specific day.
Should I invest in the stock market?
Only you and a financial advisor can effectively answer this question. Investing in the stock market isn’t for everyone. However, most young investors should strongly consider doing it.
For example, if you have a lot of debt to pay off from credit cards and student loans, an advisor may recommend you pay some of it down before jumping into the market. At the same time, you may be able to invest in the market while paying down debt.
One thing you don’t want to do is wait until you reach middle age to start investing. The reason for this is because you are going to lose a lot of time, making it that much harder for you to enjoy the fruits of compounding gains.
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The Bottom Line
Stock charts are an excellent tool that you can use to identify market trends.
Now that you have an understanding of what stock charts are, head over to Google or your broker’s platform and poke around for the charts of stocks that you are considering buying. Study how the charts behave throughout the day so you can get a sense of how they fluctuate over a trading session.
Disclaimer: Getting accustomed to looking at stock charts doesn’t make you an expert in technical analysis. Even if you start to predict stock movements, be wary of making risky predictions or trying to time the market, which is an easy way to get into trouble.
The stock market is enormous, with thousands of different components. As such, you won’t become an expert overnight. By studying stock charts regularly, and using them to guide your strategy, you’ll be well on your way to building an investment portfolio that meets your needs. I’m rooting for you!