In the tech-and-algo-dominated era we live in today, mastering the art of stock chart analysis is more crucial than ever.
To trade this environment effectively, you need to be equipped with the tools to make informed decisions quickly.
That’s where charts come in. They’re a visual representation of buying and selling in the stock market.
Charts paint a picture and tell a story. Skilled technical analysts can practically see the future in the charts — it’s like a superpower for traders.
But when you first start reading charts, it can be confusing and overwhelming. There’s a lot to learn: candlesticks, trendlines, key levels, indicators, RSI, VWAP, the list goes on…
This is why I go live every day at 8:30 Eastern for Pre-Market Prep. We break down the day’s most promising charts before the market opens, so you’re prepared for anything once the bell rings.
I’m here to help you go from a technical analysis newbie to a chart reading master.
In that spirit, let’s break down five essential methods for analyzing stock charts…
What Are Candlestick Charts?
Let’s start with the basics: candlestick charts. You might have seen these charts, but understanding them can be crucial.
Each candle on the chart represents a specific time period, and its color indicates the stock’s performance during that period.
This gives you a visual representation of the stock’s price movement within that timeframe.
A green candle means the stock closed higher than it opened, while a red candle means it closed lower. The wicks on the candles show the highest and lowest prices during that period:
Image courtesy of WikiHow
EXAMPLE: If a candle opened at $10 and closed at $10.50, but the price fluctuated between $9.75 and $11, the candle would have a body from $10 to $10.50, a wick down to $9.75, and another wick up to $11.
Support and Resistance Levels
Once you understand candlesticks, the next step is identifying support and resistance levels.
Support is where the stock price tends to stop falling, while resistance is where it tends to stop rising. These levels help you determine where to place your trades.
Simply going long near support and shorting near resistance can put you way ahead of the competition.
EXAMPLE: If a stock has support at $9.50, it means buyers are likely to step in and prevent it from falling further. Conversely, resistance at $11 means the stock struggles to break above this price.
To accurately identify key price levels, you need the best charting software. Get a 14-day trial of StocksToTrade + BreakingNews add-on for just $7!
The 52-Week High
Always be aware of the stock’s 52-week high. This is the highest price the stock has reached in the past year.
It’s a critical level because it can indicate whether long-term holders might start adding to their positions, pushing the stock higher.
The 52-week high is also a typical area for resistance levels to form.
EXAMPLE: If a stock is near its 52-week high, traders might become more bullish, expecting it to break out to new highs.
Unusual Volume
Next, look at the stock’s volume compared to its average volume. Volume is a measure of how many shares are being traded.
Unusual volume — much higher than the average — can indicate strong interest in the stock.
Consider this in combination with the total available float of the shares.
Big volume + low float = great setup.
EXAMPLE: If a stock typically trades 300,000 shares a day but suddenly trades 116 million shares, it’s a sign that something significant is happening, likely driving the price up or down.
The Previous Day’s Close
Lastly, consider the previous day’s close, often referred to as the “red-to-green” or “green-to-red” line. This is crucial for stocks that have been running for several days.
When a stock moves from below the previous day’s close (red) to above it (green), it often spikes, indicating strong momentum…
EXAMPLE: The Weak Open Red-to-Green Pattern
- Look for a stock that experienced a significant gain the previous day.
- On the next trading day, watch for the stock to open below the previous day’s closing price, making it “red” for the day.
- When the stock turns “green” by going above the previous day’s close, that’s your entry point.
- Place your stop loss just below the red-to-green line.
- This pattern helps you identify stocks that are showing strength for a second consecutive day.
Conversely, a move from green to red can signal a pullback.
There you have it — your basic guide to analyzing stock charts.
Always start with technical analysis: candlesticks, support and resistance, 52-week highs, volume, and the previous day’s close.
Fundamentals are important too, but the chart gives you the immediate market sentiment and action points. Combine technical and fundamental analysis and you’re well on your way to building a solid trading strategy.
If you’re looking to take your trading to the next level, join us in the Daily Income Trader System today. It’s a mentorship program where I host two webinars every day, offering a great way to learn and improve your trading skills.
I’m looking forward to working with you!
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade