How to read charts?
A stock chart is a little different than the basic information on a stock – stock charts include charting, or plot lines, which represent the price movements of the given stock. While you can customize how the chart is drawn (once you get more advanced), price lines are generally represented in a line or mountain chart form. The thin line represents the price movements over a given period, generally six months or one year. If you are working with an interactive chart, you can set the chart to different time frames, from five years back to one day.
However, when actually reading and interpreting a stock chart, there are a few things you should do to start.
Observe the Price and Time Axes
Every stock chart has two axes – the price axis and the time axis. The horizontal (or bottom) axis shows the time period selected for the stock chart. This can generally be customized to show anything from a year time period (or even multiple years) to a day.
The vertical (or side) axis shows the price of the stock. These two axes help plot the trend lines that represent the stock’s price over time, and are the framework for the whole stock chart.
Look for the Trend Line
This should be pretty obvious, but a good bit of the information you can glean from a stock chart can be found in the trend line.
Line charts: it simply tracks the price movements of a stock using the last price of that stock.
Bar charts: take the highest and lowest prices of the day plus the closing price of a stock to chart its trend.
Candlestick charts: look a bit more complex, but typically use clear or green boxes to indicate periods when the price of the stock closed higher (bullish) and red or pink boxes when the stock closed lower (bearish) than the previous day. The candlestick chart uses the stock’s open, high, low and close prices to chart trends.
Identify Trading Volume
In addition to just the trend of the stock’s prices, the stock’s trading volume is another key factor to look at when reading a stock chart.
The volume is generally indicated on the bottom of the stock chart in green and red bars (or sometimes blue or purple bars). The key thing to look out for when examining trading volume is spikes in trading volume, which can indicate the strength of a trend – whether it is high trading volume down or up.
Identify Lines of Support and Resistance
Another important aspect to examine on a stock chart are lines of support and resistance. Whenever a stock trades up or down, it generally falls within what are called support and resistance lines. Essentially, the support line is a certain price that the stock generally doesn’t drop beneath – it “supports” the stock upward and keeps it from trading below that price given market signals. Conversely, the resistance line is a certain price that the stock typically doesn’t trade above – it “resists” the stock pushing through that top price.