2
Jul

How to Read Stock Charts

Trading stocks in the stock market is not easy as it requires you to be aware of many things, including the latest market trends. Investing in the stock market can cause you to lose substantial amounts of money if you are not clear about the basics regarding how to proceed and where to put your money in. Stock charts are nothing but analysis of stock trends over a certain period of time. The purpose of a stock chart is to tell you the pattern a particular stock has been following, whether it has been going up, down or, for that matter, sideways. The basic assumption or rule for reading stock charts is that a stock is most likely to follow similar patterns in future as it had done in the recent past. From a stock chart you can conclude that if a stock is following an upward trend for quite sometime, then it would possibly maintain a similar trend in the immediate future and thus investing in such a stock would be safe and would possibly fetch huge returns. Sounds interesting, isn’t it? And also quite helpful! But to extract all this valuable information, you must know how to read stock charts which are one of the many methods used for predicting the stock market. If you are wondering if you would be able to read one, worry not. The entire process of mastering the art of reading stock charts isn’t as difficult as it seems. All you need is basic knowledge of what to look and where to look for it, along with practice, practice and more practice! Before we begin with the method of reading stock charts, let’s have a look at the different types of stock charts. There are basically three types of stock charts, line charts, bar charts and candlestick charts. Line charts and bar charts are not very effective in predicting the stock trends and hence are not so reliable. It is not possible to extract all the necessary information from these charts. The most popular type of stock chart is the candlestick chart, also referred to as the Japanese candlestick chart. The reason for its popularity is that it makes it simple for traders to find the required information. However, the basic method to analyze and interpret stock charts is the same, irrespective of its type. Keep reading for more. How to Read Stock Charts for Beginners You must understand the fact that in order to be able to read stock charts quickly like the trade pundits do, you need to have a good deal of experience analyzing stock trends. As for beginners, all one needs to do is to understand the basics and practice by trying to read the information from stock charts of different companies. The more you practice, the quicker you will know how to read stock charts like a pro. Here we’ll discuss the method of reading stock charts by analyzing the elements of a stock chart that you need to look for. There are many elements in a standard stock chart that enable you to interpret the information contained in it. These elements are termed as the indicators. The most basic indicators are enlisted below along with their significance. Trends The first thing that you need to look for while trying to read a stock chart is the trend. The trend can be upwards, downwards or sideways. If the trend is upwards, it signifies a rise in the price of the stocks of the particular company. A consistent upward trend in the stocks, along with other factors, can be safely assumed to be a good indicator of the fact that a prospective investor would gain from the stocks of the company. This is in accordance with the principle of technical analysis which states that stock prices mostly have a tendency to follow similar patterns in the future as they did in the past. Level of Resistance and Level of Support If you observe a stock chart closely, you’ll find that there are certain price levels at which the graph seems to have got stuck and it has remained consistently at these price levels for a pretty long time, unable to move up or down. These points are significant for the overall analysis of the stock chart because these indicate the ability of the stocks of a company to overcome situations of crisis. The level of resistance is defined as the price level the stock is unable to break through or has done so with much difficulty. Similarly, the level of support is the price level below which the stock price seldom falls. If you observe that the stock price has overcome the level of resistance in more instances than one, then this shows that the stocks of the company have the potential to recover from crisis and it is relatively safer to invest in stocks of the company. Volume At the bottom of the stock chart, you’ll find a bar graph that represents the number of people who purchased stocks of the company over a period of time. If you find that more people were interested in the stocks when the prices were up, then it is a healthy trend and in stock market terminology, is referred to as bullish (bull signifies an investor who is of the opinion that the market will witness further growth). However, if the number of interested people decrease with the increase in the price of stocks, then the trend is termed as bearish (bear signifies an investor who thinks that the market will witness decline) and it is not advisable to invest in stocks that exhibit bearish trends. Chart Patterns In addition to studying the trends given above, you should also try and find any particular patterns on the chart. There are a set of pre-defined chart patterns that you need to look out for and these can either be continuation patterns or reversal patterns. Some of the common patterns found on stock charts are given below along with their meanings.

  • Bullish Rectangle: The graph shows a continuous upward trend and indicates that the uptrend would continue.
  • Wolf Wave: Graph is in the form of a wave and the price of the stock oscillates between the levels of support and resistance.
  • Bear Flag: Indicates that the prices of stock will continue to go down.
  • Flat Base: Indicates that the stock prices have remained stable for a substantial period of time.
  • Double Top: The stock, having made two attempts to break through the resistance level, goes below the support level. It is a reversal pattern.

In addition to these, there are several other chart patterns and each one of them indicates a particular trend of the stocks. This was precisely how to read stock charts. Hope this article has helped you to understand the basics about stock charts. Once you start making attempts to read stock charts, you will soon learn the intricacies of this art. So, the next time you come across a stock chart, don’t let it baffle you. Instead, try interpreting it using the points discussed above.

Similar Posts:

Share
No Comments » Insurance News Tags: Stock, Stock Charts

Leave a Reply