How To Read Stock Charts Like A Pro

stock charts

If you are confused by stock charts, you are not alone. Reading a stock chart is intimidating yet there is no need to earn an MBA to develop an accurate understanding of what stock charts mean. We are here to help you figure out what stock charts tell you so you can be on your way to becoming a smarter investor.

Stock charts are easily accessible online

Surf the web on over to Google Finance, Yahoo Finance, CNBC or Zacks and you’ll find plenty of stock charts. However, if you are like most retail investors, you probably don’t know what these charts communicate. Type in a stock symbol, start clicking the chart and you’ll be able to view its historical price movement in specific periods of time. 

Though it is tempting to shift your analysis to other qualitative and quantitative components aside from those presented in chart form, it is in your financial interest to understand stock charts. Invest a little bit of time in learning the basics of stock charts and you’ll soon embrace the opportunity to analyze stocks with the information presented in chart format.

Basic terms to know

The stock chart visual won’t make much sense or provide valuable insight in the context of investing unless you understand the words commonly used to describe information presented there. The chart displays price movements in distinct periods of time yet there is much more to the chart than the price of the security. 

The “open” price of the stock is its initial price at the beginning of the trading day. The “previous close” is the stock’s price at the close of trading on the prior day. The “high” is the stocks’ high point in terms of price during the trading day. The “low” is the stock’s lowest price during the trading day.

The information presented within and below stock charts also reveal highs and lows in specific periods of time such as the prior year. Known as the “52-week high” and the “52-week low”, these figures are the lowest and highest prices for the stock within the prior 52 weeks of trading.

The “dividend yield” is a reference to the dividends paid by the stock. This figure is the dividend payout as measured in terms of the share price percentage. 

The “P/E ratio“, meaning the price-to-earnings ratio, is a gauge of the stock’s value in accordance with its current trading price as relative to the company’s earnings per share.  A high P/E ratio indicates the stock might be overvalued. Alternatively, a low P/E ratio indicates the stock might be undervalued. A reasonable P/E ratio is in the range of 12 to 25. However, as time progresses, most stock market analysts have elevated their acceptable P/E range largely because speculative future value has become more important to most investors than current value.

The “market cap” of a stock is a reference to its market capitalization, meaning the measure of the business’ valuation in terms of the number of outstanding shares and the price of those shares. Shift your attention to the “volume” noted on the stock chart and you will have information pertaining to the number of shares traded on a daily basis. The chart’s “moving average” refers to the stock’s average price in a specific period of time. 

Common types of stock charts

The specific type of stock chart that is best for your analysis depends on the information you are looking for. Line charts are the most basic type of chart. A line chart displays the stock’s opening price and closing price. 

Point and figurative stock charts are those that use Xs and Os to display stock price decreases and increases. The Os represent stock price decreases. The Xs represent stock price increases.  

Candlestick stock charts are commonly used by traders and investment advisors for in-depth analysis. This type of chart tracks the price information as described below in bar charts yet use shadows for tracking price pattern movement.

Candlestick Chart
Image credit: TradeStation

Bar charts track the opening and closing price of a stock including the low and high price during the trading day.

Data points to identify

The value of the analysis performed when analyzing stock charts depends on the data points. Choose the right data points and the time you spend analyzing stock charts will prove quite lucrative. Let’s take a quick look at the most important data points to identify when analyzing stock charts.

The trend line is the blue line displayed that indicates if the stock is increasing or decreasing in value. If the trend line is downward, don’t panic. Stocks undulate in price, meaning there is a good chance a downward trend line will reverse course and subsequently ascend. The trend line is sometimes shaped by daily news and other related events, be it a political development, natural disaster or industry news story. 

Image
Image credit: Investopedia

Do your research to properly analyze the catalysts of the trend line and you will develop a better understanding of why the line is moving up or down. The key takeaway from trend line analysis is it should only be used as an introductory point that serves as an overarching indication that additional micro-level analysis will be necessary.

Support and resistance lines are the levels stocks tend to stay between during a trading day or other time period. Support levels are the price levels stocks typically drop beneath. Resistance levels are those that the stock rarely rises above. However, if there is a significant catalyst such as an earnings announcement, the stock has the potential to trade above or below support lines and resistance lines.

Moving average lines provide insight when gauging price trends including investor support (or lack thereof).  Analyze pricing and volume at specific moving average points such as the 200-day mark, the 100-day mark or the 50-day mark and you will be able to determine if investors are purchasing more of the stock, selling or retaining their shares.

Image
Image credit: Investopedia

Historic trading volume details the stock’s trading volume throughout prior months and years.  This data point is valuable in the context of comparative analysis.  Compare the stock’s current trading volume to that from a couple weeks ago, a couple months ago or even a couple years ago and you’ll have a better idea as to whether investor interest has ramped up, declined or stagnated.

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