Stock charts or technical charts are one of the two most important components of technical analysis. If you are a daily trader or want to become one, these charts will be your best friend.
Whether you are new to trading or a professional trader, you have to use charts to analyze price trends, movement, reversal, and everything you need to know for trading any asset.
This article will read about different types of charts, different information that you can find from a chart, trends and their analysis, how to read stock charts, and other crucial details.
A Complete Guide on How to Read Stock Charts – Basics to Advanced:
- What is a stock chart?
- Types of stock charts
- 5 Things to look for in a chart
- Volume Analysis
- Trend analysis
- Technical indicators
- 8 Tips on How to read a stock chart
- 6 Other IMPORTANT information you can find in a chart
1) What is a stock chart?
Stock charts or stock market charts are real-time or historic price charts for different stocks, bonds, or any asset for that matter. These are a graphical representation of prices over a period of time for different stocks and other assets.
These stock charts portray the price movement in the form of lines, candlesticks, bars, and others. You can understand the price trends and any reversal in the trend following these charts.
These charts are also integrated with technical indicators to provide the buy and sell signals. You can find the highest or the lowest price within a given span, for instance, 1 year or 5 years, and similar metrics on the charts.
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2) Types of stock charts
Before you learn how to read stock charts, you need to know how many types of charts are there as you first need to identify the type of chart you are going to read. There are mainly 5 types of charts that are used in the technical analysis. They are –
1. Daily Bar Chart:
It is one of the most popular charts which provide multiple information like opening price, closing price, and highest and lowest price of the day.
There are verticals bars that represent the range of price of the asset. The horizontal line which is going towards the left is for the opening price and the horizontal line going towards the right is for the closing price.
2. Head and shoulder charts:
This chart is for understanding whether the price trend is going to reverse or not. It is a reversal chart pattern. There is a “Top” which is formed at the highest point of an upward movement and when the upward trend is about to end. There is a “Bottom” which suggests the downward trend is about to end and that is depicted by the lowest point on the downward trend.
The higher peak in between smaller peaks are known as the “head” while the other peaks are known as “shoulder”
Thus, this chart is known as a reversal chart as it is unlikely that it would follow the previous trend as the Top and the Bottom marks the end of that particular “trend”.
3. Line charts:
These charts are the most commonly used and easy-to-understand charts in technical analysis. The ‘X’ axis of the graph represents the time and the ‘y’ axis represents the price.
These charts are mainly used to depict the closing price of each day of the asset. The closing prices are plotted and a line is formed.
As you can see in the line chart above for ABC Company (hypothetical), the closing price for 5 days has been depicted in the chart. The closing price on day 1 was Rs. 100 while the same on the 5th day was Rs. 117. To check the exact value on the chart, you need to move the cursor on the exact date.
4. Candlestick charts:
The candlestick charts are advanced technical analysis tools. These are a bit complex but once you understand they can help you a lot in analyzing the price trend and other factors affecting the price of the stocks/ assets.
These charts use green and red/pink boxes to indicate the market trend. The green boxed form when the closing price is higher than the opening price (bullish) and red or pink boxes form when the opening price is higher than the closing price.
The thin line below and above the boxes shows the highest and lowest price of the day.
5. Point and figure chart:
In these charts, you will find ‘X’ and ‘O’. The price in these charts is plotted against the change in direction. When the price rises, ‘X’ is formed and ‘O’ in case of a fall in the price of the asset.
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3) 5 Things to look for in a chart
There are certain things you need to first identify and understand for reading charts –
1. You need to first identify which type of chart it is. Whether it is a bar chart, line chart, candlestick, or any other as mentioned in the above section.
2. Check the ticker above the above where the company’s information is mentioned and all other necessary details.
3. The next thing you need to do is to choose the time frame for which you want to check the chart. There are daily charts, weekly charts, monthly charts, and charts for the last five days, 6 months, 1 year, 5 years, and 10 years, and maximum time frame. You can select the 1-year time frame and the price movement that had happened in the past year will be visible on the chart in front of you.
4. By moving the cursor on a specific day or bar, candle, you can find out all the information related to that particular day or time.
5. You must check the volume of trade besides checking the price movement. This will help you understand the momentum of the price movement.
4) Volume Analysis
As mentioned above, volume is a key factor in analyzing charts and predicting tend in the market. In every chart, you will find the volume more or less. This is because of the reason that volume is a key technical indicator.
The volume patterns you need to know for reading charts are as follows –
1. Market up with High Trade Voume= Bullish Trend:
On days when the market is going up and the trading volume is high indicates a bullish trend. It usually means that the price of the stock will continue to increase.
2. Market down with Low Trade Voume= Bullish Trend
On the other hand, if the volume of trading is low on a day when the market is going down, also indicates a bullish market. This is because of the fact that not many investors/ traders are participating in the market when it is down and thus it is a temporary slowdown and correction which is not going to last for long.
3. Market down with High Trade Voume= Bearish Trend
Now if the volume of trading is high on the days when the market is going down (stock price decreasing) then it indicates a bearish trend or a market when the whole market is selling.
4. Market up with Low Trade Voume= Bearish Trend
Finally, if the volume is low on days when the price is going up also suggest a bearish market to persist and the increase in the price is just a short-term counter-trend retracement.
So, volume is crucial because just by looking at the price no one can anticipate whether the trend is going to persist or reverse but when you monitor price movement along with the volume of trading, it can give you a clear picture of the market.
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5) Trend Analysis
So, charts are basically for analyzing and anticipating market trends but to understand the trend and analyze the same? Here are the details of analyzing the trend in few simple steps:
1. Persistency of the trend:
The first thing you need to see is for how long the trend is persisting. No trend will be forever, it will change over time. If any trend is continuing for a long time and there hadn’t been any retracement as well (not significant corrections) then it is a sign of being alert for a trend reversal soon.
2. Volatility of the stocks:
Some stocks are stable while others are volatile. If you are trading a volatile stock, then even within a long-term trend, the graph will be going up and down regularly. You need to focus on the long-term for all these volatile stocks and need not consider the changes in the short term.
3. Signs for trend reversal/ momentum indicators:
Some certain signals/ indications suggest a potential reversal in trend. You need closely observe and analyze those indications. Especially momentum indicators help you recognize if the trend is going to reverse or not based on the volume of trading.
If you can analyze and anticipate the trend in the market, you can easily trade any asset smoothly. However, anticipating it requires precision and fine observation skills.
Read our complete guide on How to Analyze Stocks to Get Good Returns.
6) Technical Indicators
Stock market charts without any technical indicators are just like graphs to look at. Yes, you can check them and analyze certain things but if you want to make them helpful in your daily trading, then you need to integrate the technical indicators in your charts. Here is a list of two basic and most important technical indicators to use with stock market charts.
1. Moving averages:
The first one is the moving average. It is a key tool in technical analysis. The average stock prices over some time are plotted on the chart for analysis.
There are different types of moving average as well mainly depending upon the time frame. There are 50-day moving average, 200-day moving average, and others. The 200-day moving average is one of the crucial ones in chart analysis.
If the trader is bullish about any asset/stock then he or she needs to check whether the stock price was above the 200-day moving average of the stock price or not. On a chart, the 200-day moving average has to be plotted, and then the daily price movement has to be monitored.
On the other hand, if the trader is bearish, then he or she would want to price to remain below the 200-day moving average.
If the price crosses the 200-day moving average from below then there is going to be a bullish market reversal. While if the price line cuts the 200-day Moving Average from above, then a bearish trend is going to start.
2. Support and resistance:
Another important technical indicator to know about when reading charts is support and resistance levels. These two levels also help in identifying any upcoming trend reversal.
The support level is the level when the demand for the stock is too high to let the price of the stock fall. The resistance level is the level on the upward side where the selling pressure is high and doesn’t let the price move up that level.
It helps the traders to buy at the support level price and sell at the resistance level price and earn profit out of it. If there is a price-breakout for any stock having very strong support and resistance level, then it indicates a further price movement in a similar direction.
For instance, the resistance level of ABC stock is Rs. 1000 and for a long-time, it was trading below Rs. 1000. However, now the price has finally reached Rs. 1010, this means the resistance level has been broken. This indicates a further price rise for ABC Company’s stock.
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7) 8 Tips on How to read a stock chart
As you know by now, the important things to check in a chart, let’s try to read the chart given below. It is a Tata Motors Ltd. chart on 27th of July, 2021.
1. It is a candlestick chart
2. The opening price for today is Rs. 293
3. The last closing price was Rs. 292.5
4. This means it opened today at a higher price than last trading session
5. The volume of trading is 25.6 Million
6. The 50-day moving average is Rs. 325.63 while the 200-day moving average is Rs. 262.03.
7. The price has cut 50-day moving average from above which signifies a bearish trend and as you can see in the chart, the price is dropping for Tata Motors.
8. The volume on the days when the price is decreasing is higher which also suggests a bearish trend.
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8) 6 Other IMPORTANT information you can find in a chart
1. Dividend yield:
In some charts, you can also find the dividend yield of the company. The dividend yield is the percentage of return on the dividend. This is calculated by dividing the dividend received annually by the market price of the stock at present.
2. Dividend per share:
Similarly, there can be dividends per share also represented in some stock charts. This is the annual dividend paid by the company to the shareholders.
3. 52-week high and low:
These 2 numbers are very important to the traders. You can find these 52-week highs and low often in most of the charts either at the top or the bottom.
The 52-week high is the highest price reached within the past 52 weeks or 1 year. Similarly, the 52-week low is the lowest price of the last 52 weeks.
4. Price to Earnings Ratio:
The P/E ratio may be also found on some charts as it is a key metric for stock analysis. It is derived by dividing the market price of the stock by the earnings per share (EPS) for the last year.
5. Net change:
This is another metric given in any stock chart and it is the change from the previous day’s price. In the chart given above, the net change is -0.25% which keeps on changing as the price of the stock changes.
6. Market capitalization:
Most stock charts also include the market capitalization of the company. This is the value of the total number of stocks outstanding.
For instance, if there are 1000 outstanding stocks of a company and the market price of each stock at present is Rs. 100 then the market capitalization of the stock at present is Rs. 100,000.
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So, reading charts is a bit tricky, however, you can learn to read them and then use them for your daily trading. If you want to learn how to read stock charts and pick stocks wisely and trade, then you can enroll in technical courses at Koppr.
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2. How to pick stocks?
3. Futures and Options
4. Fundamental Analysis
5. Value Investing
6. Intraday Options Buying Strategy
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8. Options Spread and Options Chain
9. Learn how Scalp Trading Works, etc.
You can choose the course according to your interest and enroll for the same if you wish to learn about the different stock market strategies that can help you build your stock portfolio.
Charts can be extremely helpful in daily trading as they have all the required information in one place and you can just check everything on that single page.
Moreover, if you can integrate the technical indicators and use real-time charts, it can provide you with buy and sell signals too.
Moreover, like Benjamin Graham said in his book, the Intelligent Investor that “An intelligent investor is a realist who sells to Optimists and buys from Pessimists”. After reading all the stock charts, you will realise how true this quote is!