How to read a Stock Chart
So you have decided to trade stock. Maybe you have read a little bit on how to do it or maybe you went in without any prior experience. What happened is that you sat down in front of your computer, log into whatever trading platform you chose, and pull up the charts. But then comes the problem. Nothing makes sense to you. How to read a stock chart?
You see a lot of green and red. Bars running across the chart, middle and bottom. You see lines zig-zagging up and down. You look at the numbers and they sort of make sense to you. But the whole chart looks like a mess and you cannot make head or tail with it.
If that is you, do not feel bad about it. Everyone has to start from somewhere and the chart is perhaps one of the biggest culprits that drove many potential traders away from the game. It might look complicated at a glance, but when you learn how to read the charts, things will just click into place and you will know it like the back of your hand. In this article, we will go over how to read stock bar charts?
The Basics of Stock Chart Analysis
Let’s start from the basics. A stock chart is a graph that tells you the price of a given stock over a certain period. Some charts provide additional data but you can learn a lot about the stock value just by understanding the basics. You want data on the stock’s performance in the past, present, and future.
One thing to know about how to read a stock: ticker. This is the company’s “ticker symbol” or an identifier on the stock exchange. For Apple, it would be “AAPL”.
Pulling up such a chart is as easy as a quick Google search. In this example, we will take a look at Apple stock. You can either type “Apple stock” or “AAPL”. You can use Google Finance or Yahoo Finance, they provide the same data. In this example, we would be using Yahoo Finance.
When you click on the link for Yahoo Finance, you should see something like this:
Pull up the full screen and you should see a chart similar to this one:
Again, it does look confusing, but this is why we are here. Let us break this down into a few pieces. Let’s assume that we want to see Apple’s performance in the last five years, so go ahead and click on the “5Y” tab.
This is what most stock charts are going to look like. If you want to know how to read a stock chart on Robinhood or any other platform, then they will look very similar to this one. So, what kind of information can we glean from this handy little chart.
This one is probably the most prominent feature of the chart. It goes up or down, simple stuff. What a lot of people do not know lies in the little details.
Notice how Apple’s stock price take a huge dive but then always make an impressive comeback and peak right back up again. What is so notable about these? There is some news that trigger events that caused the price to plummet. If a new caused such a dramatic shift, you want to know what is going on. Not all companies can make a comeback from such a sudden change in stock price.
The fact that Apple experienced its fair share of highs and lows, and is now continuing to push the highest of highs shows that they still have plenty of steam left.
Also read: Simple moving average trading strategy
Support and Resistance Levels
These levels are not so clear since they are not shown on the chart. But you can just eyeball it.
Note the red lines above. Those placed above the trend line are the resistance levels. Those below the trend line are the resistance levels. So, what are they?
Think of support level as the temporary price floor. The stock price comes close to this level, sometimes dipping below it for a moment, before bouncing back up. The stock price just does not go below this level. Why? Because there are usually traders who would “buy the dip”, therefore driving the price back up.
The resistance level is the opposite. They are the temporary price ceiling. Again, they stop the price from going beyond that because traders see that the price is sufficiently high enough, so they cash in their stock, which drives the price back down.
You might also notice that sometimes prices do break through these levels and indicators can warn you about imminent breakouts. But using indicators requires an entire article in itself. You might also notice that the previous resistance level suddenly becomes the new support level after a breakout. This is pretty normal.
What you need to understand about support and resistance levels is that they are mostly speculative. Identifying these levels give you a pretty good idea when you buy (at support) or sell (at resistance) the stock. They will not provide you with a solid trigger on when to buy or sell, so you need to use your judgment.
Also read: Best forex strategy for consistent profits
Dividends and Stock Splits
Dividends are when the company gives a cut of the company’s profit to the shareholders. If you happen to be holding onto the stock for that company, you get some money. How much is proportional to the number of that company’s stock you have. Keep in mind that not all companies do this, but do not let this factor alone decide whether you should invest in that company.
Some companies just prefer to reinvest the extra cash into further developing and growing the company. Some companies can do both without cutting corners and Apple is one of them.
A stock split is when the company wants to issue more shares of the stock to the public. Let’s say that Apple does a five to one stock split, what would happen? For one, if you happen to be holding onto 10 stocks, you would have 50 after the split.
Apple’s overall value does not change, individual stock prices will. Companies pull this strategic move to attract smaller investors or if their price does not match their competitors. Usually, after a stock split, the stock price goes up. This is because the stock price suddenly becomes affordable to a lot of people, and they want to grab it while it is cheap.
Splits and dividends are the Ss and Ds in the chart, and hovering your mouse over them gives you additional information.
You may notice the little green and red bars at the bottom of the chart. They are volumes, which tell us how many assets are being bought or sold at that particular moment.
A lot of novice traders skim over volume since it comes with the chart, so they underestimate the value of this handy indicator. That said, volume should not be the only indicator to use when making a trade decision. It is a rather stable market when the volume is low. However, when the volume suddenly spikes, it could be good or bad news for the company. Here, we will take a closer look at Apple’s stock price in the last few years.
Notice the two areas in the red boxes. As you can tell at a glance, there was a high volume of trading activity in both instances. We know that traders were selling or shorting the stock price because most of the bars are red. And we also see a steep price drop because other traders panic and start selling off their stocks as well, which pushes the line further down. But of course, the price eventually hits the support level and it bounced right back up.
Of course, you might notice similarly high trading volume outside the marked area. There is no correlation between stock price and trading volume. However, knowing what they were in the past and present can help with your trading decision. What is certain is that higher volume means that you can buy or sell stocks faster.
Also read: Fibonacci trading strategy
How to Read a Stock Chart, Strategize, and Profit
This is the basics of how to read stock charts for day trading. As you might expect, there is a lot more to stock trading than this. We have mentioned indicators in the article. They provide even more information and help traders identify entry and exit points. In short, it can be complicated and time-consuming to understand it all.
Lucky for you, you do not have to waste so much time learning how to read stock chart patterns. You do not have to even spend time reading how to read stock charts for beginners pdf books or how to read stocks for dummies book either.
You can enrol in our One Core program right here on AsiaForexMentor. Many traders enrolled in our course and we equip them with all the skillset necessary to start winning. We go over how to read a stock chart, using indicators, and forming a trading strategy. We are often cited as the last stop for trading education because our ROI-focused trading system works. If you want a sample of our course, you can get it for free, and it is highly recommended that you at least grab it on the way out. It contains some helpful information that should help you to become a more effective trader.