If you are new to the investing world and trying to read a stock chart, you’d probably agree that you are not enjoying it. But this is the primary skill that you should be good at if you really want to grab good investments for your portfolio. At first, reading stock charts may seem a daunting task but the help of some basic tips and a lot of practice will soon make you grab winning stocks. You will understand the way to purchase a stock and the right to sell these. Before understanding the important parts of the stock chart reading, let’s first understand stock charts.
Stock charts are advanced charts that have a set of information about a particular company’s stock that shows the data about the change in price, current trading price, dividend, historical highs and lows, trading volume and financial information.
Beginners can follow some of the below-given tips to understand the stock chart.
Analyze the Price and Time
There are two axes in every stock chart namely- the price axis and the time axis. Let’s start with the horizontal axis, it shows the time period which is selected for the stock chart. It can be customized to represent anything from a day to a year. The vertical axis represents the change in the price of the stock. Both the axes help in plotting the trend lines showing the stock’s price and works as a framework for the whole stock chart.
Observe the Trend Line
You can choose different chart styles from mountain bars, traditional lines, candlestick etc depending upon the type of chart you want to go for.
- Line charts are easy to use, track the price change of a stock with the help of the last price.
- Bar charts include the highest and lowest prices of the day along with the closing price of a stock for creating chart trends.
- Candlestick charts are quite complex, use clear and green boxes for indicating periods when the stock’s price gets closed higher and red or pink boxes when closed lower. The candlestick chart uses the open, low, high and close price of the stock for trends in the chart. In candlestick charts, the open and close prices are considered as the most important to find out if there was an upward or downward momentum for the stock.
Identify Trading Volume
While reading a stock chart, the trading volume of the stock is another key factor to go through. The volume is generally indicated in green and red bars on the bottom of the stock chart. The primary thing to look out for while examining the trading volume, indicating the strength of a trend. Whether it is high trading volume upwards or downwards. If the price of a stock falls and the trading volume levels up, there is strength to the stock’s downward trend as opposed to a momentary blip.
Identify Lines of Support and Resistance
Another aspect to check a stock chart is through lines of support and resistance. Whenever a stock trades goes upward or downward, it usually drops within and is known as support and resistance lines. The support line is a particular price that the stock generally doesn’t fall. It supports the stock upwards and keeps it below the price for the provided market signals.
Here are a few basic elements that are included in a stock chart and beginners should be aware of-
- Price And Volume – It is quite difficult to analyze the price and volume together to understand the chart. And, if you only go through the share price change, you will not get what buying and selling is all about. If a stock shows high profit but the number of shares that are traded are generally low, it clearly shows that it is a fake.
- Moving Average Lines – These lines help you in tracking the share price movement over a period of time. They are crucial in understanding if a stock is being supported or sold by several big investors. It’s always better to watch your stocks behaviour while trading around the moving average lines.
- Relative Strength Line – These lines are a quick way to instantly check if your stock is performing or not. Analyze the relative strength line to compare the performance of the stock’s price. A sharp rising RS line indicates that trending down shows that the stock is lagging behind the market.
- Understand historic trading volumes – You will see several small and vertical lines at the bottom of the chart. It shows the trend of the volumes at which the stock is traded. Volumes are good but they should not act as the only determining factor while buying a stock.
Once you know all the basics of chart reading, you will be able to analyze different activities of the stock at a higher level.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.