Reading Stock Charts – The Basics
When you first take a look at a stock chart, the information you find may a bit overwhelming. Sure, it kind of looks like the same type of graph you’ve seen since 2nd grade, but what does everything mean? To truly understand your investment portfolio, you need to learn how to read stock charts.
If you’re looking at the stock charts in your local newspaper, the type of chart you’ll typically see there is a line chart. This chart simply takes the closing price for each day and connects them in a straight line. On the right hand side of the chart you will see numbers that correspond with the price of the stock. These prices usually are broken down to the penny, so if you’re stock has closed at $10, you will see the line’s last point at 10.00. If your stock raises a dollar in price, to 11.00, it is said to have raised a point. On the stock market, a point is equal to $1, or 100 pennies. On the bottom of the chart you’ll find the date. So that means a stock chart is plotted as time vs. price.
If you’re looking at time-frames shorter than a day, typically used for short-term trading, the time on the bottom of the chart will be broken down into smaller increments. They can be as small as 1 minute (typically used for day trading stock charts), or as large as 4 hours (which is frequently used when trading the Foreign Exchange). By using these small time-frame charts, traders attempt to capitalize on the fluctuations a stock goes through during the trading day. If you’re looking at stock only on a daily basis, you may only see small shifts in the price, but a stock can move several points up or down during the day, only to bounce back to being very close to its opening price. Line charts are not very useful in this capacity, so either a bar chart, or a candlestick chart is used. Both of these types of charts display either a bar, or candlestick per unit of time. These bars/candlesticks show the highs & lows as well as the opens & closes. This is much more useful when day trading or swing trading, because it gives a bit more insight into the stock’s past, and potential future movements.
That pretty much sums up the basics of reading a stock chart. To begin to be able to use this information for your investments, you’ll have to look into technical analysis. Technical analysis is the study of a stock’s data, including its charts, to understand past movements, and attempt to predict future movements.
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