When you first look at stock charts, they can seem a little overwhelming. After all, there is so much to look at. After reading this in depth article, you will know how to read stock charts and how to use that knowledge to determine trends and understand market sentiment.
I am going to show you how to read line charts, bar charts, candlestick charts and identify support and resistance as well as trend lines. I will be using the free website Trading View to snap these charts and use them. I like their interface and I love how much you can customize them. Most brokerages offer free charting right in their brokerage account but I prefer this third party software myself.
How to Read a Line Chart
Well, the first thing to do is go over the common line chart. It is the simplest chart to get started with and a lot of the other charts can be explained easier after you understand how the line chart is organized.
As you can see in the image, there are a few sections that are labeled.
Section 1 shows you the Ticker symbol which is FIVE. The D next to it means that each point on the chart is represented by 1 Day. This can be changed to reflect other time intervals such as 1 minute, 15 minutes or even Month. The last part is a squiggly line that represents that you are looking at a line chart. This can be changed into any of the charts explained below.
Section 2 shows the name of the company which is FIVE BELOW INC., and what exchange it is traded on which in this case is the Chigaco Board of Options Exchange. Not shown is that it is listed on the NASDAQ exchange.
Section 3 is showing you that a line graph is just like it sounds, a line representation of the stock price as referenced to a specific time (represented by days on the horizontal axis across the bottom of the chart and price as represented in USD on the right side of the chart. You can see next to Section 2 coordinates typed in blue are representing the end of the graph as highlighted on the right.
Section 4 is showing you a graphical representation of volume traded. Each bar represents one day since this is a day chart. You will notice that each month has less than 30 days and that’s because Saturdays, Sundays and Holidays are not shown since trading does not occur on those days.
Section 5 shows the customization area where you can select how much data is shown. If you want to see a certain time frame you can select a preset time like 1 month, 3 months, 1 year, etc. or you can select a custom range by clicking Go To…
That’s basically all there is to reading a line chart. Another chart style that is very similar is an area chart which merely shades below the line chart to make it easier on the eyes but the data shows the exact same information as a line chart. Here’s an example of an area chart.
An area chart is read exactly the same as a line chart so I am not going to give it it’s own section. You can see though that it is easier to spot where the price is higher and lower though by the contrast of blue on white.
How to Read a Bar Chart
Now let’s look at the bar chart which gives traders and investors a little more advanced way to analyze stocks. The benefit to bar charts is that they are a convenient way to see how the stock was trading throughout each day. If you look at picture, I’ve zoomed in a portion of the chart to better see it and understand it.
Since I have this chart set at “1D”, each bar represents 1 day. The shape will make a lot of sense once I describe the 5 parts of it.
Point 1 is the little tail facing left that represents what the price was at the start of the day. This is known as the OPEN price.
Point 2 is showing you the highest price of the stock throughout the day. This is the price, the stock peaked at.
Point 3 is showing the price that the stock closed at and is a tail facing the right.
Point 4 is the lowest price that the stock has reached during the day.
The length of the bar shows the range of price for that time frame. It stretches from the highest to the lowest price for that stock during that time frame. The color of the bar is dependent on if the close is higher or lower than the open.
If the stock closes at a higher price, it is green to symbolize it was bullish for the time frame of that bar.
If it closes below the open price, the color will be red to indicate that the stock traded bearish over that time frame.
How to Read Candlestick Charts
Candlesticks are very similar to bar charts but I feel like they are used a lot more by traders than bar charts. I’ll spare you the history lesson about where candlesticks originated and just focus on showing you what makes them valuable and how they can be interpreted.
Let’s start out with a chart of this article’s favorite stock FIVE (this is not an endorsement in any way. It was just a convenient stock to choose for illustration purposes.)
Candlestick charts are generally used by traders to see how a stock traded over a certain time frame. In this case, we are using the “D” chart so each candle represents 1 day.
The color of the candles indicate the direction of the stock or whatever asset is being represented. In this chart green is used for bullish candles where the closing price is above the opening price and red for bearish candles when the stock or asset closes below the opening price.
Point 1 shows the opening price for the time frame which is a day in this example.
Point 2 shows the closing price for the time frame of the candle.
Point 3 is the highest price that the stock traded for the candle
Point 4 is the lowest price that the stock traded for the candle.
Since it’s green, this candle shows that the stock opened at Point 1 and fluctuated during the day between prices at Point 3 and Point 4 and closed for the day at Point 2.
The area that is shaded green is considered the body of the candle. The thin lines that extend past the body are considered wicks. The area between Point 1 and Point 2 is considered the body. Whereas the distance from Point 2 to 3 or Point 1 to 4 are considered the wicks
Why Read Stock Charts?
Most people that read stock charts do it for one of two reasons. Some do it to merely get a quick visual of how the stock has been performing overall.
Maybe they are thinking of investing in the stock but want to make sure it’s had a healthy record. Maybe some big news came out that got someone thinking about the stock such as an Earnings Announcement or a new product launch.
Whatever the case may be, getting a look at the stock chart might help a new investor decide if it’s the right time to enter into a position.
The other type of person that reads stock charts is your everyday stock trader. A stock trader isn’t usually someone that is investing in a company for years at a time. They are looking for short term gains and fast payouts. This is of course a generalization. By short term gains and fast payouts, I mean everything from a trade that last a few minutes (day traders), a few hours or days, (swing traders) and even a few weeks (position traders).
Looking at charts to identify “Buy” and “Sell” signals is called Technical Analysis. It is a speculative type of trading based on raw data and signals from the charts. For example, some patterns can be identified by the disciplined trader to signal that it is the right time to buy or sell stocks based on their previous education or experience.
Technical Analysis is not an easy thing to master and some investors will argue that it isn’t a science at all. They argue that no one can consistently beat the market through analysis of charts. Then again, there is a huge following of avid traders that believe they can and perform very well using this type of analysis.
What I like about technical analysis is that it can be as complicated and as simple as you desire. Everyone looks for different patterns and signals.
I’m not going to go in depth in Technical Analysis here. This post was just to give you the opportunity to see different chart examples and learn how to read them. I hope you found it interesting.
If you have any questions or comments, I’d love to hear them below. As always, if you know someone that could benefit from this article, please share this with them. I’d love to get this information to as many new investors as possible!
Thanks for reading. Now Let’s Start Investing!