Are you thinking of getting started in stock trading or forex trading? Well, you will need to first learn how to read stock charts. It doesn’t matter which style of trading you embrace, whether be it technical or fundamental analysis, you’ll still need to use charts to understand market behavior.
Stock charts can be used to determine a number of things, for example:
- Opening Price
- Closing Price
- Bullish/Bearish Patterns (and so forth).
The best part is, if you are looking to learn the basics of reading stock charts, you can do so using free tools. Some common places where you can find them freely include FinViz, Yahoo Finance, and Google Finance. In addition, you can always get free charts from your preferred stock brokerage firm.
The point is, there's no shortage of free stock charts out there and with just a bit of training, you can become a pro at studying chart patterns. Let's get you started.
Stock Charts – What They Are & How To Read Them
A lot happens behind the scenes in the world of trading. To capture all that, there has to be a system that reflects market behavior. And just the same way doctors use a patient’s pulse to understand how they are responding to different treatments, stock traders use stock charts to visualize market behavior.
Charts are mostly used in technical trading although even those who use fundamental analysis often tap into them from time to time to verify information. In a nutshell, when you study charts you are able to monitor quotes of financial instruments and respond to market changes.
It is, however, worth noting that while most premium charts provide real-time information, others (mostly free ones) provide delayed data.
Different Types of Charts
Although there are many types of charts that are used for stock analysis, the four common ones are – bar charts, line charts, point & figure, and candlestick charts.
Candlestick charts are the most common ones in the world of stock trading and for many good reasons. They originated from Japan in the 1700s and are loved by many traders because they not only visualize volatility but also market emotions.
Let’s take an example:
Whenever the market is bullish, the entry prices are normally below exit prices. This is signified by a green (or white in some cases) candle suggesting the fact that a stock is gaining in value and that stock traders are buying and selling at a profit.
On the contrary, when the market is bearish, the entry prices are normally above the exit prices meaning that investors who bought the stock (going long) are losing. And those who sold the stock (going short) are making a profit. This candlestick is typically red in color although colors may vary from one platform to the next one.
So, as you can see, it is possible to gauge to market emotions by simply looking at the candles. A bearish candle suggests that the stock is losing value and that short sellers are making a killing while a bullish one suggests the exact opposite.
Different Stock Chart Time Frames
You can customize your chart’s timeframe based on the period of time you want to analyze or visualize. Timeframes can either be short-term, medium-term or long-term so it all depends with your preferred style of trading.
If you are a day-trader, you could focus on short-term charts to capture short-term trends that typically happen minute by minute.
Medium-term trends are ideal for swing traders who typically open trades and leave them overnight or over the course of a few days.
It also goes without saying that long-term charts are popular among long-term traders who prefer to focus on weekly and monthly charts.
So, depending on your preferred style of trading, you can choose from the different timeframes available and these typically include:
- M1 – 1 Minute
- M5 – 5 Minute
- M15 – 15 Minute
- M30 – 30 Minute
- H1 – Closes Hourly
- H4 – Closes every 4 hours
- D1 – Closes Daily
- W1 – Closes weekly
- MN – Monthly
Please note that the timeframe label may vary from terminal to terminal. For instance, M1, M5, M15, M30, H1, H4, D1, W1, and WN are used on a terminal called MetaTrader4 (MT4) while 5M, H, D, W, and M are used on the Finviz platform. They all represent pretty much the same thing.
It is also important to clarify that some charting platforms do allow you to customize your charts using your preferred timeframes. So, for example, if you desire to visualize the market action in 3-minute segments, you can customize your charts to do that for you.
Find A Charting Platform to Use
This is the first step you need to take so you can learn how to read and interpret stock charts. And as we have already mentioned, free charts can be found on platforms like FinViz, Google Finance, Yahoo Finance and some broker sites e.g., on TD Ameritrade.
The main downside to using free stock charts is that you have to put up with annoying ads. And that is besides the fact that data may be delayed.
Most providers of free charts also provide premium charts – but an extra cost.
To use your favorite charts, you’ll need to launch your platform of choice then locate your favorite index. The NYSE, NASDAQ, DJIA, NIKKEI are just but a few of the indices commonly used in the stocks market.
Not sure which index holds your preferred stock? Well, you can always use the search tool to narrow down your search. Most stocks from major US companies are found on NASDAQ and the NYSE. The NASDAQ index is a favorite for technology firms such as Microsoft, Apple, and Tesla while the NYSE holds the like of Exxon Mobil, Citigroup, and Pfizer.
Please note a qualifying company can choose to have its shares listed on multiple exchanges provided it meets the individual listing requirements of those exchanges. That is, a company can list on NASDAQ and NYSE at the same time.
A symbol like NASDAQ: AAPL indicates the Apple Inc listing on NASDAQ. While the symbol NYSE: XOM refers to Exxon Mobil Corp’s listing on the New York Stock Exchange.
How To Read Your Favorite Stock Charts
This is now where the rubber meets the road. We’ll take an example using the Exxon Mobil (XOM) stock on the free Finviz charting platform.
A ticker is, simply put, a stock symbol. It is normally made up of a unique series of letters and can be used as a shorthand way of representing a company’s stock. Stocks trading on the NASDAQ are allowed to use up to five characters on their tickers while those on the NYSE are allowed a maximum of four letters.
This indicates the current day and date of trading. Across the world, most exchanges open during regular business hours and typically on business days.
Open, High, Low, Close
This bit of information tells you the price at which the stock opened and the highest price achieved during that trading day. It also shows you the lowest price along with the closing price. Once the market closes, the last price of the day is the closing price.
This section shows you the number of shares traded within that particular day. The higher the volume the greater the movement tends to be. Also, high volumes tend to suggest a high level of interest in a particular stock in a given time period.
This indicates the period of time or timeframe being visualized. You can change the timeframe to suit your style of trading. Other periods include intraday, weekly, and monthly.
This is the second part of the stock chart that covers volume. You can use it to understand how a particular stock’s volume behaves, in different time frames. In other words, it helps you narrow down to the finer details.
Time is of the essence in the world of trading. Depending on the timeframe you're trading under, the scope of time may also change on the chart.
You can study this in relation to the most recent candlestick to visualize the current stock price. Remember, red candles are in most cases accompanied by falling stock prices. And green or white candles by rising stock prices.
Is the stock price rising or falling? And by what percentage? This section of the chart provides you with an even closer look at the market behavior at that given time.
Resistance and Support Trendlines
These are important tools especially in technical analysis. The lines suggest different price points with a high probability of yielding a reversal in prices (going against the prevailing trend).
Support lines suggest when a downward trend might stop, reverse, or pause. A resistance line suggests instances when an upward trend may pause or reverse.
The Use of Technical Indicators in Analyzing Stock Charts
As much as you would like to manually read stock charts, it is not humanly possible to keep up with all the happenings in the market at any given time. This is why savvy traders prefer to use technical indicators.
These indicators normally use complex algorithms to analyze things like historical data, volume, price action, and even trendlines.
The Bollinger Bands is one of the commonly used indicators. Developed by John Bollinger in the 80s, it is defined by a set of trendlines based on two standard deviation marks against a simple moving average (SMA) in the middle. As such Bollinger Bands are characterized by three lines.
Normally, when the market price moves toward the upper line, it is believed to indicate that the market is overbought. And likewise, when the price leans toward the lower line (or band), it is believed to indicate that a certain stock is oversold.
A widening Bollinger Band indicates periods of high volatility while price breakouts above any one of these bands indicate an unusual or major event in the market.
The moving average is yet another commonly used technical indicator. Its popularity stems from the fact that it is really easy to understand as it simply smooths out price trends by filtering out irregular price fluctuations.
There is a virtually endless list of stock chart indicators to choose from. In most cases, it is advisable to experiment with a few of them until you find one that suits your style of trading. Also, it is possible to create and load custom indicators on some charting platforms.
Ultimately, all technical indicators are created to fulfill the following purposes:
- 1Identifying Existing Trends: Bollinger Bands, Trendlines, and Moving Average indicators are quite good at this. You can use them to identify downtrends, uptrends, or situations where a stock lacks a clear sense of direction.
- 2Determining The Strength in Different Trends: It is not enough to assess the direction of a trend; you need to also assess its strength. You’ll need indicators like MACD, ADX, and RSI to identify how strong a trend is and how likely it is to continue.
- 3Identifying Potential Trend Pauses and Reversals: It is important to always be one step ahead of the market and this is where the capability to detect trend reversals before they happen comes in. Examples of indicators that are normally used to track reversal patterns include the Fibonacci, moving average crossovers, and MACD.
- 4Volume Indicators: These kinds of indicators are best used to tally up trades and determine whether the market is bullish or bearish. Examples of volume indicators include On-Balance-Volume (OBV) and the Chaikin Money Flow indicator.
There’s no doubt that the ability to study stock charts is one of the most useful assets you can get. However, it is worth clarifying that no stock trading strategy is perfect. Even the best stock chart analysts often make losses.
Like any other skill, you can only master the trade through practice. Ultimately, it takes discipline, patience, and a bit of lack to improve one’s overall profitability.
Above all, there’s no limit on how much you can learn. The more you can learn, the better. So, don’t hesitate to invest in the training e.g., by signing up for trading courses and dedicating time to learn.
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