For actively trading stocks as an investor, you need to know how to read stock charts. Through stock charts, you can determine specific buy, or entry, and sell, or exit points. Understanding chart patterns help you in analysis and make prudent investment decisions. Let us understand the various types of stock charts, their components, and much more.
You need to understand stock charts and their patterns to figure out price movements and other crucial stuff. Stock charts can differ in their construction, right from bar charts to line charts to candlestick charts to point and figure charts.
Almost all stock charts allow you to switch between the various types, as well as the ability to overlay various technical indicators on a chart. There are pros and cons to using different chart construction styles. You should choose a stock chart that makes it easy for you to read and analyze and trade profitably.
Before understanding how to read stock charts, let us learn about the various types of stock charts and some of their common components. The different types of stock charts are:
These are arguably the most popular charts among investors. You will find this chart by default on various financial websites. Similar to all stock charts, the X-axis indicates price while the Y-axis represents time. From there, a line plotting prices at different points shows the historical performance and direction the stock is heading.
This stock chart has red (for price decreases) and green (for price increases) instead of a line plotting price movements. Each stick represents the open price, closing price, high price, and low price. Note that the wide body of each candlestick is a representation of the range between a stock’s opening and closing prices.
These stock charts represent candlestick charts, but the body of the candlestick isn't filled in them. Top and bottom of each bar reflect the high and low prices. On the other hand, horizontal lines between the bars reflect the price at which the stock opened and closed during each trading period.
These are the only charts that don't follow the traditional structure of displaying open, close, low and high prices over a period of time. They put a close emphasis on the closing price of the financial asset. The aim is to give investors a wider picture from a supply-and-demand perspective.
Some common components of stock charts include:
Volume is a key component of every stock chart and it is considered a crucial technical indicator. This is because large institutional traders do the majority of buying and selling.
When they make significant buy or sales of a stock, the same creates high trading volume. It is that kind of buying and selling from large investors that moves a stock higher or lower.
High and low are essential as they show the stock's range throughout the trading day. It helps you find out the highest and lowest price. It also helps understand the risk of volatility. Highly volatile stocks will have wider gaps than stocks with low volatility.
Open indicates the opening price of a stock at the start of the trading session.
It indicates a stock's closing price in the previous trading session. To find this price, take your mouse over the previous day.
Stock charts show you real-time prices as well as the price that changes over a period of time. Lines track price changes over time on line charts and bars and bars and candlesticks do on their charts.
On your journey to how to analyze stock charts, volume plays a crucial role. As said earlier, it is an important technical indicator. Institutional traders closely analyze volume figures to find out buying and selling activity and use this information to forecast future prices. They also use it to identify resistance level and price support.
Several investors make their buying and selling decisions almost entirely based on the actions of major institutional traders. They buy stocks when volume and price movement indicate buying from institutional traders and sell or avoid buying stocks when indications are of selling.
Note that high volume is an indication that a stock is actively traded. That means high liquidity and an indication that exiting your position will not be a problem. A stock, on the other hand, with low trading volume could present liquidity issues in the coming days.
Some of the common patterns in stock charts include:
It is a chart pattern where a large peak has a slightly smaller peak on either side. Traders use it to gauge bullish-to-bearish reversal.
It is another pattern used to highlight trend reversals. Typically, a stock's price will peak and then retrace back to a level of support. It will once again rise before reversing back against the prevailing trend.
This chart pattern indicates selling period, which causes an asset's price to drop below from a level of support. It is a bullish reversal pattern as it indicates the end of a downtrend and shift towards an uptrend.
A bullish continuation pattern, cup and handle is used to show a period of bearish market sentiment before the overall trend comes in a bullish motion.
This pattern is created after an asset undergoes a period of upward movement, followed by consolidation.
It is a bullish continuation pattern that signifies uptrend continuation. It is drawn by placing a horizontal line along the resistance and then drawing an ascending trend line along the support.
Contrary to an ascending trend, a descending trend signals bearish continuation.
This stock chart pattern can be either bullish or bearish and depends on the market. It is a continuation pattern and indicates that the market will continue to move in the same direction once the trend has formed..
Before going ahead on how to read the share market chart, you need to be aware of some technical indicators. These include:
Moving average also known as simple moving average is used to identify a current price trend's direction, devoid of short-term price spikes. Data depends on the MA's length. For instance, a 200-day MA requires data of 200 days.
It is another form of moving average and puts greater emphasis on recent data points. It can help you confirm significant market moves and the most popular exponential moving averages include 12, 26, 50 and 200-days.
This technical indicator compares the asset's specific closing price to a range of its prices over time on a scale of 0 to 100. Reading below 20 indicates oversold market and above 80 an overbought market.
The band is an indicator that provides the range within which an asset's price typically trades. The change in width of the band is a reflection of volatility.
The Ichimoku cloud is used to identify support and resistance levels. It helps identify market trends and forecasting future levels.
It is an indicator that helps you measure the size of price moves. With it, you can identify how volatility is likely to affect price in future.
Stock chart analysis like other things is a skill that you can master with time and practice. Learning to read a stock chart can help you become a successful stock market investor.
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