How to Read Stock Charts?

‘How to read stock charts’ is one of the primary questions that a new investor faces. Trading can be an overwhelming experience, as you need to understand various aspects and terminology of the share market. To become a successful investor, you must know when to buy, hold, or sell the stocks. Reading stock market charts will help you understand market behavior and trends. These charts indicate the performance of the stock over a period. Let us learn about what is a stock chart, how to read stock charts, the types of stock charts, and more in detail. Keep Reading!

What is a stock chart?

A stock chart showcases stock price movement over a specific period in graphical form. You can analyze market trends and behavior using the stock charts. You can check the stock price movement for days, weeks, months, or years depending on your requirements. The chart includes opening and closing share prices, highs and lows, and trading volumes. Using this information, you can identify patterns and trends and make informed investment decisions. The X-axis (horizontal) represents time, and the Y-axis (vertical) represents price. An upward trend is indicated by green candles, whereas a downward trend is represented by red candles.

Different time frame charts and their validity

Types of stock charts

To read stock charts, you need to first identify the type of stock chart. Below are a few of the types of stock charts:

Line chart

A line chart displays all the closing prices of a stock over a period of time with a continuous line. As a beginner, it is ideal to use a line chart to get an overview of a stock's performance over a period. A line chart is useful for identifying any long-term trends. However, a line chart is not useful for identifying short-term analysis as it displays intraday price movements and doesn’t show opening, high, or low prices.

Bar chart 

The bar chart offers you a more in-depth analysis with open, high, low, and close prices for each period. Using a bar chart, you can identify more detailed information, with each bar representing one period, displaying the range of price movement with horizontal ticks and vertical lines. Bar chat can be complicated for beginners; however, it is useful for traders who are looking for short-term trading.

Candlestick chart

Similar to bar charts, a candlestick chart showcases open, high, low, and close prices for each period with the use of a more visual format. The opening and closing prices are represented by the candlestick body with various colors, green or white for closed high, and opened lower than the previous day is represented by red or black. Using the candlestick chart, you can easily identify price patterns and market sentiment, allowing for quick decision-making. However, if you are a beginner, you may be required to spend more time learning as it demands practice to interpret candle patterns.

How to read stock market charts – Tips

To read stock market charts, you must keep the following points in mind:

Identify trends

You must start with identifying trends, i.e., the direction of the stock price is moving. While reading the share market chart, you will see an upward trend (bullish), a downward trend (bearish), and a sideways trend (neutral). For instance, you can buy during an upward trend and sell during a downward trend.

Support and resistance levels

Using support and resistance levels, you can identify price points on a stock chart where the price had difficulty moving past historically. With support levels, you can easily identify a trend where stock prices stop falling below a certain level whereas resistance levels help you identify prices where the stock prices stop rising at a certain level. Using support and resistance levels, you can predict future price movements.

Moving averages

The moving average is the average stock price of the stock over a specific period of time, which can be used to identify trends. Generally, a moving average of 50 days and 200 days is considered. An upward trend is considered if the share price is above the moving average. On the other hand, if the share price is below the moving trend, it indicates a downward trend.

Volume averages

Volume helps you find the number of stocks traded in a particular period. It is considered one of the important factors to read stock charts. High trading volume indicates increased buying or selling pressure, showing strong momentum. You can use volume to confirm trends and breakouts.

Technical indicators

Using the technical indicators, you can gather additional information about the market conditions. Below are a few technical indicators that you can use accordingly.

• Bollinger Bands: To show the volatility of the stock price, plot a band around a stock’s price. A stock is more volatile if the band is wider.
• Moving Average Convergence Divergence (MACD): It is used to calculate the difference between the two moving averages to identify changes in momentum.
• Relative Strength Index (RSI): By comparing the magnitude of recent gains to recent losses, the strength of a stock’s price movement is measured.