The stock chart is a trader’s home base for performing technical analysis. When properly understood and analyzed, it can provide investors with a treasure trove of data to inform their predictions of how a stock will perform in the future.
Passive investors, those who follow a buy-and-hold strategy and often invest in index funds or ETFs, may be able to get by without gaining an understanding of stock charts.
But if you have short-term growth goals or would like to invest in individual stocks, knowing how to read a stock chart will be critical to your success. In this how-to guide for beginners, you’ll find step-by-step instructions to guide you on your way to reading a stock chart like a pro.
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What is a Stock Chart?
A stock chart is a chart that shows how the price of a stock, exchange-traded fund (ETF), or other security has fluctuated over time. There are many websites that provide stock charts for free. A few popular examples include:
- Yahoo Finance
- Google Finance
Most stockbrokers allow their clients to view stock charts inside their trading platforms as well. Some brokers offer more charting bells and whistles than others. Some of the best brokers for performing stock chart technical analysis include E*TRADE, Ally Invest, and TD Ameritrade.
Types of Stock Charts
There are several different ways that investors can view the data available on a stock chart. Three of the most popular chart types are the line chart, bar chart, and candlestick chart. Here’s a quick breakdown of what you’ll see with each type of chart.
A line chart shows the stock’s closing price for each trading day of the date range. It’s the simplest of the three chart types and is a popular starting point for beginners.
The bar chart also shows a stock’s closing price. But it also shows three more pieces of information: the opening price, the highest, and the lowest price of the day.
Days, where the closing price is higher than the opening price, will be shaded green, while days with closing prices below their opening prices are shaded red.
The candlestick chart shows all the same data as the bar chart, but in a slightly different format. The top and bottom of the candle’s body (shaded section) represent the opening and closing prices of the day.
On green candles, the close price will be at the top of the body and the open price will be at the bottom. For red candles, the open price is at the top and the closing price is at the bottom.
The shadows or wicks (a few of them are noted below) indicate the highest and lowest prices of the day. Small wicks mean that the stock’s highest or lowest prices were close to the open or closing prices. And the opposite is true for candles with long wicks.
So, for example, if a green candle has a tall upper wick, that means its closing price was significantly below its highest trading price for the day.
How to Read a Stock Chart
To create the sample screenshots for this post, we used the stock charting tools at Yahoo Finance. But no matter which site or stockbroker you use, you’ll want to start by typing in a stock symbol into your tools search engine.
In my case, I began by typing in AAPL, the stock symbol for Apple. If you don’t know the symbol for a particular stock, you may be able to search for the company by name (i.e. Apple or Amazon.) Or you can do a quick Google search to find the stock symbol for the company you want to research.
Once you’ve found the stock you’re looking for, you’ll see a stock chart similar to the ones shown above. It’s at this point that you’ll want to pick your chart type of preference (line, bar, or candlestick). Now you’re ready to start analyzing! Here are 7 steps to get you started.
1. Choose a Date Range
The very first factor you’ll want to consider is the time axis of your chart. Depending on your stock trading tool, you may have more or less date range options available to you. As a general rule, the longer the time frame, the more significant the trend.
For example, let’s say that I was thinking about buying Apple as a long-term investment. In that case, its 1-year growth trend would probably be more important to me than its downward movement over the past month.
However, it should be noted that your trading strategy will heavily influence which date ranges matter the most. For example, if you’re a swing trader, the 1-month or even 5-day charts may be far more important to you than the 1-year chart. And if you’re a day trader, you may really only care about how a stock is faring intraday.
2. Identify Short-and-Long-Term Trends
Once you’ve selected your date range, it’s time to look for trends. You’ll want to focus on the overall price movement from left to right on the chart rather than each individual mountain or valley. Returning to Apple’s 1-year chart again, we see that its 1-year trend has clearly been upward.
If you were considering Apple as a long-term investment, this trend would be encouraging. However, day and swing traders might feel concerned with its 1-month performance. The trend for the first half of the chart is downward and the second half of the chart shows a sideways trend.
The sideways trend at the end of the chart could be an indication that Apple is preparing for a reversal of its recent decline. But a further breakdown is certainly possible as well. In this case, short-or-mid-term traders may decide that the technical analysis cues are simply too inconclusive to make Apple a viable play.
3. Examine the Trading Volume
At the bottom of your stock chart, you’ll find green and red vertical bars spread out along the time axis. These bars show the stock’s total trading volume for each trading day.
As you’re evaluating trends, you’ll want to pay special attention to high-volume days. Why? Because high volume indicates that institutional investors are involved in moving the stock up or down. So the higher the trading volume, the more likely that the trend is legitimate.
It’s easy to identify high-volume days. Simply look for the trading days that have the tallest volume bars. The chart below notes several high-volume green and red days for Apple over the past year.
4. Mark Basic Support and Resistance Levels
Support and resistance levels are moments in a stock’s history when supply and demand have stopped upward or downward trends in their tracks.
A stock’s value appreciates when demand outweighs supply. But eventually, the stock will reach a price point that causes these market forces to switch. Suddenly, more traders are selling said stock than buying and the stock will begin to move down in price. These price points are called resistance levels.
In a contrasting manner, when a declining stock finally reaches a price point that attracts more buyers than sellers (and, thus, begins to appreciate), it’s said to have reached support. In the chart below, you’ll see that Mcdonald’s has recently shown resistance at about the $230 mark and support at around $208.
Twice in October, Mcdonald’s stock approached $230. Both times supply outpaced demand and the price was pushed back down. The stock also reached the $208-$210 range in December and again in January before bouncing back up on both occasions.
This would indicate that a good entry point for Mcdonald’s would be near the $210 mark while $230 might be a worthy exit point.
Support or resistance breakthroughs can also inform trade decisions. For example, if Mcdonald’s dropped below $208, that could point towards a breakdown and trigger a trader to sell. Conversely, a trader may decide to enter a position after it breaks through $230 as this could be indicative of a breakout.
5. Look for Price Channels
If a stock hits a support or resistance level one time, that’s not necessarily a strong indicator it will happen again. But when a stock’s price moves back and forth more than once between two parallel lines of support and resistance this is called a price channel and is a strong predictor of a stock’s future behavior.
There are three types of price channels: ascending, descending, and horizontal. The chart above is technically an example of a horizontal price channel as it hits the same support and resistance levels twice. But the Netflix chart below is a stronger example as the support and resistance levels that formed its channel were touched four times each.
Below is an example of a price channel with an ascending pattern.
In both screenshots, we’ve noted when the channel pattern is broken. Channel breakouts could mean the stock is ready to move upward at a faster pace. But a channel breakdown may mean it’s time to exit your position and take your profit.
6. Consider Moving Average Indicators
Moving averages are some of the most widely used indicators in technical analysis. As its name suggests, a moving average simply shows a stock’s average price over a set period of time.
If your charting tool offers moving averages, you can set whichever time period suits you. Popular options include 25, 50 (as selected below), 100, and 200 days. But feel free to experiment with other ranges.
Often, a moving average indicator can act as support or resistance for a stock. For example, you’ll notice in the J&J chart below that its price would bounce back whenever it would fall to its 25-day moving average.
Knowing that a moving average has become a stock’s defacto support or resistance can be a tremendous help in selecting entrance and exit points. But, just as with traditional support and resistance levels, you’ll want to reevaluate your trading strategy once the stock breaks through its moving average.
7. Note Past and Upcoming Corporate Events
As the final step in your stock chart reading, you’ll want to take note of corporate events that could lead to artificial price jumps or drops. Two prominent examples include dividend payouts and stock splits.
Prices will always decrease immediately after a stock split as the number of outstanding shares increases. Dividends, however, can affect a stock’s price in different ways.
For example, a dividend declaration can drive prices up. But prices may decline in the time period between a dividends ex-date and its payout date as investors who buy the stock during that time know they won’t be eligible to receive it.
Stock Charting Tools
Finding a broker that offers stock charting tools can improve your trading efficiency as it allows you to research stocks and execute trades all in the same place. Here are our favorite brokers for investors who want advanced charting options.
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TD Ameritrade has long been one of the most popular brokers for active traders thanks to its powerful thinkorswim® platform. Its menu of technical analysis charts and tools is virtually unmatched in the industry.
With thinkorswim®, you get access to 400+ technical studies, 20 drawings, and eight Fibonacci tools. Its StockHacker tool makes it easy to quickly find the stocks that meet the attributes you care most about. And with its thinkScript tool, you can even build your own testing algorithms.
TD Ameritrade offers thinkorswim® for free to all of its clients. And the platform is available on the web, Windows, Mac, iOS, and Android.
Like the other stock charting tools on this list, TD Ameritrade charges no trade commissions on stocks, options, or ETFs and there are no account minimums. Plus you can get up to a $2,500 cash bonus when you open a new account.
E*TRADE offers fantastic stock charting tools through its Power E*TRADE platform. The platform offers over 14 chart studies and drawing tools. It can calculate your risk/reward probabilities and will even automatically draw support and resistance lines and point out technical patterns.
Power E*TRADE is offered completely free to E*TRADE clients. The platform is available on the web as well as on iOS and Android. Further, E*TRADE doesn’t charge trade commissions on stocks, ETFs, or options and there are no account minimums.
Ally Invest offers an impressive array of charting tools to its Self-Directed Trading clients. Traders can choose from eight different chart types, 117 studies, and 36 drawing tools. It also offers a customizable options chain for executing options trades with up to four-legged spreads
There’s no account minimum to get started with Ally Invest and its trading software is free to all clients regardless of account size. Stocks, ETFs, and options trade commission-free. Plus, new account holders can earn up to $3,500 in bonus cash.
Reading a stock chart and performing the technical analysis can shed light on how the forces of supply and demand may impact a stock’s price in the near future. This is different from fundamental analysis, which tries to determine a stock’s value at its current price point.
Many investors take both technical and fundamental analyses into consideration before making trade decisions. In general, the longer your investing horizon, the more you’ll want to study a stock’s fundamentals. And, the shorter your horizon, the more time you may want to spend studying the charts.
Continued Reading: How to Start Investing: A Complete Guide for Beginners