For everyone who wants to invest, stock charts are very important. They make investment easier. Some people want to invest their money, but they chicken out at the last minute because they cannot read and understand stock charts. All they see are lines, and they do not even know what those lines represent. It is okay if you are like this, and I was once like you. But stock charts are pretty easy to read and understand.
If you want to learn how to read stock charts, this article is what you need. It explains everything you should know about stock charts and how to read stock charts with no experience. Of course, it is pretty easy to learn once you know the basics. But before we get into the process of how to read a stock chart for beginners, we need to answer some questions like; what are stock charts? How can investment make more sense?
What are stock Charts?
Stock charts are an essential part of investments. A stock chart is a chart that shows everything about the stock. For example, it shows the price of a stock over a specific period, and it shows other information like the stock symbol, the chart period, price change, last Change, and the volume.
A stock chart is a table or graph showing information on a particular company’s stock prices. When reading a stock chart, you get information on price changes, the current trading price, dividends, trading volume, historical highs and lows, and any other financial information about the company.
A stock chart is basically a progress report of a company’s finance, and it guides you before you invest and even during investment.
Basic Terms You Need To Understand
When you are going through a stock chart, there are certain things that you will come across. These are the terms that are going to be explained to you. Once you know these basic terms and how to look out for them, you’re already half a pro at reading stock charts. The fundamental terms you need to know are:
Stock Symbol and exchange: it is also known as the Ticker symbol. It is the sign of the stock and the particular exchange the investment happens on. Every company has its own exchange symbol or ticker, so you have to make sure you know the company’s stock symbol you want to invest in.
Chart Period: This shows the length of time a particular investment has been going on. It can also be a particular day, week, or month. Again, it depends on what the trader or investor wants to see.
Price Change: The information here comes in categories for each day. We have the “open” price and “close” price. These are the prices at the beginning of the day and at the close of the day. Then, there are “high” and “low.” “High” is the highest price during a particular session, and “low” is the lowest price during that same session.
Previous close: it is the price the stock closed 24 hours before. It is also called Prev. Close.
Last Change: it displays the Change from the previous price, increase or decrease.
Volume: it is the number of stock sales over a period of time. If the volume is low, it means few people are trading at the current price, while if the stock volume is high, it means that many people are participating in the trade. When the volume is high over a while, it leads to trends.
Dividend: A dividend is a small amount of money paid to shareholders out of a company’s profit. There are companies that do not pay dividends, so not all stick charts have dividends. But if you are trading with a company that gives a dividend, it will be shown on the stock chart. The dividend yield is so calculated. It is the percentage return on that dividend.
The price to earnings ratio: is called the P/E ratio. It is very important when looking at stock charts. How do you know the P/E ratio? The current stock price is divided by the earnings per share for the past year.
Net Change: a net change is a change in the dollar value from the previous close. When a stock is “up for the day,” it means there has been a positive net change, and if the stock is “down for the day,” it means that there has been a negative net change.
Types of Charts
There are different types of Charts. The type of chart you’re looking at determines the type of information you will get from it. There are three major types of Charts: the line chart, the bar chart, and the candle and stick chart.
Line Chart: The line chart is the least used chart. It shows only a compilation of the closing price of a stock over a period. It’s best for long-term traders and investors. It helps you see an overall view of how the price is behaving.
Bar Chart: This is the most popular chart. It plots the Open, High, Low, And Close – also known as (OHLC) – for each day. There are also HLC bar charts that don’t show the opening price.
Candlestick Chart: This chart also shows OHLC but in a more appealing way.
HOW DO YOU READ A STOCK CHART FOR BEGINNERS?
After getting familiar with all the terms above, it is time to put them to use and learn how to read stock charts. To read the stock chart, these are the things to do:
Observe the Axis: In every stock chart, there are two axes. The bottom axis (also known as the horizontal or time axis) shows the specific period of time that has been chosen for the stock chart. This period ranges could be days to weeks to months to a year or many years. It depends on the period of time that has been selected. The side axis (also known as the vertical or price axis) shows the price of the stock.
The time and price axis make up the trend lines and show the stock price over time.
Find the Trend Lines: with trends, a certain amount of information is represented. For example, when the volume of a stock is high and many people are participating in the trade, it becomes a trend. A trend is one of the ways to know good trade, although it is not the only way.
Trend lines depend on the type of chart. The line charts give basic information on the trends, and Bar charts use the highest, lowest, and closing prices to show the trend, while candlestick charts use the OHLC to show trends. But the opening and closing prices are most essential because they determine upward or downward momentum on the stock chart.
Identify the Trade Volume: The trade volume is an important factor when reading stock charts. The volume is represented at the bottom of the chart in colors. The colors may vary from green
and red bars to blue bars or purple bars.
When checking trade volumes, it’s important to look out for high volumes. It means that a lot of people are participating in the trade; hence, it may indicate a strong trend.
Locate Lines of Support and Resistance: The line of support is that specific price that the stock never drops lower than.
The support line holds the stock and ensures that the price doesn’t go beneath that line. The resistance line is the price that the stock never goes above. It resists and ensures the stock is never sold above a certain price. Stock prices always circle the range of the support and resistance lines. These lines help in the prediction of stock; when it might increase or decrease.
These are the basic things to know about how to read stock charts. However, there are some other technical things to learn when trading stocks, but as a beginner, you are good to go with the points above. If you want to, you can decide to learn more.
These are a few more things to note when trading stocks:
Stocks do not move in one direction, and swings are very normal.
What may seem like a big spike or blip might not be what it is. So, it is necessary to always check the time and price axis and know their ranges.
When it seems like a stock is rising, it is better to look at stock charts for longer periods of time to be sure of the trend.
It’s also important to determine if you are trading short-term or long-term. Some things that are of advantage to a short-term trader might not be of advantage to a long-term trader and vice versa.
The final thing to note is that practice makes perfect. The more you practice reading stock charts, the better you get at reading stock charts. I am sure that after a while, you will become a professional at it.
