How to Read Stock Charts : Let’s Cover the Basics

By June 27, 2019Uncategorized
how to read stock charts

Finding stocks to trade can be hard when there are so many options in the market — but finding out how to read stock charts is key to finding opportunities.

So what’s a stock chart? 

When you see a picture of a trader’s desk, you normally see a bunch of screens displaying lots of intricate lines and graphs. Those are stock charts.

Reading stock charts is an absolutely fundamental skill in the arsenal of almost every top trader, so it’s important you get up to speed with chart reading.

In this post, I’ll explain the basics of how to read stock charts for beginners. And I’ll show you how you can use this skill to help you find trades that meet your criteria. I’ll also give you a few hints as to how you can shortcut your chart-reading learning curve.

Let’s get into it…

How to Read Stock Charts for Beginners

In the most simple terms, a stock chart is a picture of a stock’s historical price and trading volume in the form of a graph.

On most charts, the x-axis (horizontal, left to right) represents time, and the y-axis (vertical) represents price.

By reading a stock chart, you can see a stock’s price at specific points in time. This can help you see historical patterns. And that can be an aid in determining how the stock price might move next.

There are TONS of different stock charts, but for the sake of simplicity, let’s narrow our focus. First I’ll cover a basic — the line chart, then I’ll move onto the most common: the bar chart and the candlestick chart, in the following examples.

The Line Chart

Amazon (NASDAQ: AMZN) line chart (Source: StocksToTrade.com)

The line chart is probably the most basic way to view a stock price on a chart. The price is plotted at certain points at certain times on the chart. These points connect to form a line.

Eventually, when you have enough price points, you have a basic line that zigzags and trends depending on price action. Line charts are simple, but not too commonly used by traders. But it’s important to know about them.

A lot of traders use the following two chart types … let’s check them out.

The Bar Chart

Amazon (NASDAQ: AMZN) Bar Chart (Source: StocksToTrade.com)

Bar charts show the stock price open, high, low, and close in a specific time period:

  • The top of the bar represents the high.
  • The bottom represents the low.
  • The left vertical line represents the open.
  • The right vertical line represents the close.

The time period that an individual bar represents all depends on which time frame you use on your charting platform. On a 5-minute chart, each bar represents five minutes. On a daily chart, each bar represents the price action of a single trading day.

The Candlestick Chart

Amazon (NASDAQ: AMZN) Candlestick Chart (Source: StocksToTrade.com)

Candlestick charts are similar to bar charts but show price action in a slightly different way. Some traders find these charts easier to read.

So why are they called candlestick bars? Because their shape looks like a candlestick…

The body is the candle. That’s the thick portion of the bar, and this represents the difference between the open and the close.

And the small lines above and below the body are called wicks. The end of each wick represents the high and low prices.

Which Chart Type Should You Use?

Deciding which stock chart type to use all comes down to a matter of personal preference.

Give both bar charts and candlestick charts a try. That’s a key way to determine which feels more comfortable for you.

You can then decide on a color scheme. Traders commonly choose green for bars where the price increases and red for bars where the price declines.

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Why Use Stock Charts?

Carpenters use hammers, surgeons use scalpels, and most stock traders use charts … these are the basic tools of the trade.

Don’t overlook stock charts. It may seem like a basic tool, but they can be highly powerful in helping you understand stock price action. It can help you make more-intelligent, better-informed trades going forward.

Sure, it may seem simple, but a stock chart can show you so much:

  • A stock’s price trend
  • Support and resistance levels where price has halted or reversed
  • The momentum of a price move
  • Where to place your stop-loss to help you limit your risk
  • And so much more

Almost all the best traders base their trading decisions on information gleaned from a stock chart — even if they have other reasons (such as exciting news or a company announcement). 

So it’s important that you know how to clearly and confidently read a chart…

What’s on a Stock Chart?

By now, you should have a basic understanding of what a chart is and how useful they can be to traders.

Now for the next step in understanding how to read charts: They can show you more than just historical prices. Here’s a quick breakdown what you’ll commonly find on a stock chart:

Price

Price is the most basic thing you’ll find on almost every chart.

Let’s go back to math class for a sec. Remember that a graph has a y-axis that runs vertically from high to low. And it has an x-axis running horizontally from left to right. Price charts show the same thing.

The y-axis (vertical) represents the stock price, and the x-axis (horizontal) represents time…

On a line chart, price is plotted at points that represent where the stock traded for a specific point in time. 

On a bar or candlestick chart, the open, high, low, and close will be shown for a specific period of time (such as a five-minute period).

Trading Volume

Amazon (NASDAQ: AMZN) chart with volume histogram at the bottom (Source: StocksToTrade.com)

The second most common thing you’ll find on charts is the trading volume.

Trading volume shows you how much of a stock was traded at a certain period of time and at what price. This can help you determine which price levels may excite traders, prompting them to enter and exit trades.

Volume is most often shown as a histogram (vertical bars) at the bottom of the chart. FOR EXAMPLE: A horizontal volume bar below a 5-minute candle will tell you how many shares were traded in that five-minute period.

Technical Indicators

Once you have a chart that shows price and volume, you can then add technical indicators for more insight into what’s happening with price and volume.

There are many different technical indicators, and they generally involve manipulating price and volume data that can quickly show you what’s happening with price momentum, trend, and many other things.

Here’s a breakdown of two of the most popular and powerful technical indicators:

Moving Averages

Amazon (NASDAQ: AMZN) chart with a 20-period moving average (Source: StocksToTrade.com)

Moving averages are considered the granddaddy of technical indicators. If you pick up a 100-year-old trading book,it probably mentions them.

If traders have been using them for that long, it’s probably a good sign that you should at least know how to use them. Luckily, this indicator is pretty simple to understand and can be placed on just about any chart.

A moving average is a line on the chart that shows the average price for a specific time period.

FOR EXAMPLE, you can use a 20-period moving average on a daily bar chart. The 20-period moving average takes the previous 20 days’ prices and averages them. This smooths out the price movements and can show you the direction of a price trend.

Now, how you use the moving average all depends on your trading strategy

One common approach is to only buy stocks that are above the moving average or if the moving average is pointing up. So you would only buy or trade a stock when the price is moving higher.

The Volume-Weighted Average Price (VWAP) Indicator

Amazon (NASDAQ: AMZN) 5-minute chart with VWAP (Source: StocksToTrade.com)

Next, we have a more modern indicator that day traders (traders who enter and exit trades in a single day) commonly use.

The volume-weighted average price (VWAP) indicator is a line on the chart that looks similar to a moving average, but the VWAP line represents the price at which the majority of volume was traded on a stock.

Day traders find this information useful as it can show whether traders who have recently entered positions are currently in a profit or a loss. Knowing this can be an indication as to whether these traders should exit their positions, which may cause the price to fluctuate.

There are many other ways to use the VWAP. But the general idea is that it can help you stay on the right side of market momentum.

For a more in-depth look at the VWAP, check out this post.

Learn More About Reading Stock Charts

The ability to read stock charts is a very fundamental skill that you’ll develop and refine throughout your entire trading career.

There are some encyclopedia-style books that list every known chart pattern and indicator. These books can be thorough … but also kinda dry and boring. More importantly, you’re not learning in real time.

The most effective way to learn to read charts is by watching the action as stock prices move up and down. That’s why is so important to have a trading platform with charting capabilities.

Another piece of the puzzle is knowing what to look for on a price chart. You can spend hours staring at the chart, internalizing every little nuance, while and slowly but gradually improving…

Or, you can step up your game by watching how a professional trader approaches reading charts and placing trades each day.

That’s exactly what we do in StocksToTrade Pro. That’s our friendly, elite trading community where you can attend multiple daily webinars to see which stocks I’m watching each day and where I see trading opportunities.

AND you can participate in live chats and network with trading peers who are learning the markets just like you. You’ll also get access to live educational webinars where I teach powerful trading strategies to help you learn how to trade in different markets.

Mentorship can be a powerful aid in helping you in your trading and chart-reading journey … So if you’re ready to ramp up your trading, I invite you to join StocksToTrade Pro.

Take Advantage of StocksToTrade Features

What’s the most important thing to have if you want to learn to read charts? Easy — you need access to stock charts.

Sure, you can access free charts online, but know that they can often come with a time delay. So pricing data isn’t always current. 

But if you want to easily flip through lots of charts, use indicators on them, and see what’s happening in the market in real time, you’re better off using a trading platform. Check out StocksToTrade, an all-in-one stock trading and research platform.

We have awesome charting capabilities and countless other features that make the life of a trader so much easier. Things like powerful stock scans, the ability to build and maintain multiple watchlists, live news feeds, social media hits on stocks you follow, and so much more.

It’s no mistake that some of the best traders in the world use our platform. But check it out for yourself. See what can help you every single trading day. Get your 14-day trial of StocksToTrade for just $7 today!

Conclusion

I hope this post lights your charting fire. 

Here’s my challenge to you: Pick a few stocks you’re excited about and start tracking the charts. Get comfortable with every bar and line. Then start to piece together each stock’s big picture. Play with different indicators…

I’m not exaggerating when I say that learning to read stock charts is one of the most fundamental and powerful skills you can develop for your trading career.

So take your time to really internalize the concepts in this post. After that, you can view more detailed posts or come and join StocksToTrade Pro to see how I view charts each trading day.

If you’re ready to get charting, but don’t have a way to get started, try StocksToTrade for 14-days for just $7. This powerful tool can help you quickly and easily scan and view the charts of any stock listed on all the major American stock exchanges.

What’s your go-to stock chart? How do you place use indicators with your charts? I’d love to hear your process — share your comments below!

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