How to Read Stock Charts: Key Takeaways
- Knowing how to read stock charts is essential to trading success…
- Chart patterns that traders must learn to recognize…
- How trading indicators can be helpful when making big decisions…
Beginner traders MUST learn how to read stock charts to find success in the market. The learning process can be slow, but, to me, it’s so rewarding. Let’s dig in. Keep reading for what you need to know when it comes to reading stock charts.
Table of Contents
- 1 How to Read Stock Charts: Why Use Stock Charts?
- 2 How to Read Stock Charts: What’s on a Stock Chart?
- 3 How to Read Stock Charts for Beginners
- 4 Daily vs. Weekly Charts
- 5 How to Read Stock Charts: Common Chart Patterns for Traders
- 6 Common Technical Indicators That Can Help
- 7 How to Identify Support and Resistance Levels
- 8 Stock Market Trends: How to Identify Trends on Charts?
- 9 Frequently Asked Questions About How to Read Stock Charts
- 10 How to Read Stock Charts: Learn More
- 11 StocksToTrade and Learning How to Read Stock Charts
- 12 How to Read Stock Charts: Conclusion
- 13 One Platform. One System. Every Tool
How to Read Stock Charts: 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. They’re basic tools, but they can be highly powerful. Traders use them to understand stock price action and help them make more intelligent, better-informed trades.
Here are some of the things a stock chart can show you:
- A stock’s price trend
- Support and resistance levels
- Price momentum
- Where to place a stop-loss to help limit risk
Many traders base their trading decisions on stock charts. So it’s important for every trader to know how to read stock charts.
How to Read Stock Charts: What’s on a Stock Chart?
Here’s a quick breakdown…
Price is the most basic thing you’ll find on almost every chart.
The y-axis (vertical) represents the stock price, and the x-axis (horizontal) represents time…
On a line chart, price is plotted at points where the stock traded at specific points.
On a bar or candlestick chart, the open, high, low, and close display for a specific period (such as a five-minute period).
Charts also show trading volume.
That tells you how much of a stock traded at a certain period and at what price. This can help you determine which price levels may excite traders to enter and exit trades.
Volume often displays in vertical bars at the bottom of the chart. For example, a horizontal volume bar below a five-minute candle will tell you how many shares traded in that five-minute period.
Once you have a chart that shows price and volume, you can add technical indicators.
There are many technical indicators. They can show you price momentum, trends, and more. Here’s a breakdown of a popular technical indicator…
The Volume-Weighted Average Price (VWAP) Indicator
Day traders like the volume-weighted average price (VWAP) indicator. VWAP is a line on a chart that looks like a moving average. But the VWAP line represents the price at which the majority of volume was traded on a stock.
This can show whether traders who recently entered positions are currently in a profit or a loss. And that can indicate whether these traders should exit their positions, which may cause the price to fluctuate.
There are many ways to use the VWAP. The general idea is that it can help you stay on the right side of market momentum.
How to Read Stock Charts for Beginners
In simple terms, a stock chart is a graph of a stock’s price and trading volume.
Charts help you see patterns. And that can be an aid in determining how the stock price might move next.
There are TONS of different stock charts, but let’s narrow our focus. Here are a few examples…
The Line Chart
The line chart is the most basic view of a stock price. 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. Traders don’t generally use line charts.
A lot of traders use the following two chart types — let’s check ‘em out.
The Bar Chart
Bar charts show the stock price open, high, low, and close in a specific period:
- The top of the bar represents the high, and the bottom represents the low.
- The left vertical line represents the open.
- And the right vertical line represents the close.
The period an individual bar represents can vary. On a five-minute chart, each bar represents five minutes. On a daily chart, each bar represents the price action of a single trading day.
The Day Trader’s Favorite: Candlestick Charts
Candlestick charts are similar to bar charts but show price action differently. Lots of traders love these charts because they’re rich in information.
Why are they called candlestick charts? Well … Because their shape looks like a candlestick!
The body is the candle and represents the difference between the open and close.
And the small lines above and below the body are called wicks. The end of each wick represents the high and low prices.
Daily vs. Weekly Charts
Weekly charts cut out some of the weird stuff that can happen in a single day. This helps you better key in on the setup and trend.
Both offer useful information. How did the stock close yesterday? What happens the morning after a poor close and vice versa?
How to Read Stock Charts: Common Chart Patterns for Traders
There are a lot of patterns to learn while figuring out how to read stock charts. I think these six are MUSTS for beginning traders…
Triangles (Ascending and Descending)
Ascending and descending triangle patterns are pretty easy to learn and very useful for trading … Just make a triangle!
A stock’s typically gearing toward a run when the top line is horizontal and the bottom line is ascending. On the flip side, the stock could tumble if the bottom line is horizontal and the top is descending.
There can also be a ‘symmetrical triangle,’ which could go in either direction. The stock typically moves BIG when it decides which direction to go…
Head and Shoulders
The head and shoulders pattern is good for determining when a trend might reverse.
The pattern works like this:
- The price rises to one level, forming the first shoulder.
- Then it declines and rises again to a higher peak, forming the head.
- It declines once more, rises to the level of the first shoulder, and declines again.
The stock forms a support level called the neckline. The support will likely fail after the second shoulder forms, sending the stock into a downtrend.
There’s also the inverse head and shoulders. The two shoulders peak higher than the head. This is an uptrend pattern. The stock heads higher after the second shoulder forms.
Cup and Handle
This is a pattern for patient traders…
A stock’s rejected at resistance and falls. It slowly climbs up and meets resistance once again. This forms a U shape.
The stock will once again become rejected at resistance. Its fall is much shorter this time, forming the handle. It climbs again and finally breaks through resistance.
The wedge is similar to the triangle. But the trend lines often suggest a reversal…
Volume can fizzle on the way up and lose steam, giving into sellers.
It happens the other way, too. The stock can become oversold and start churning upward.
You may hear me talk about a stock gapping up a lot. This is an interesting part of a chart often due to news or earnings reports.
A gap is a literal gap between two price points. This happens if the opening price is significantly higher or lower than the previous day’s close.
These trends don’t usually reverse quickly. Sometimes you have to hang around and determine whether the stock can support its higher price. Oversold stocks can also fight back if the market overreacted…
Basic Volume Patterns
Volume and price action both matter when trying to determine where the stock’s going next…
- Trend confirmation: If volume’s high and moving in a single direction, the trend will likely continue.
- Trend weakness: If the volume’s low and the stock’s moving in a certain direction, that’s likely not a trend that will hold up.
Common Technical Indicators That Can Help
Here are a few technical indicators to help you while learning how to read stock charts…
Bollinger Bands are tied to moving averages but make it easier to see where a stock might be heading.
They can signal a move in either direction when the top and bottom bands close in.
Moving averages are technical indicators.
A moving average is a line on the chart that shows the average price for a specific period.
For example, you can use a 20-period moving average on a daily bar chart. That takes the previous 20 days’ prices and averages them. This smooths out the price movements and can show you a price trend’s direction.
How you use the moving average all depends on your trading strategy…
Average Directional Index (ADX)
Average directional index is a good indicator to help determine a trend’s strength.
Like most indicators, it should be paired with analysis. Don’t rely on it alone.
Trends can reverse quickly. ADX can sometimes make it seem like a trend is stronger than it is.
Relative Strength Index
Relative strength index can help determine a stock’s strength or weakness … Traders often use it to determine whether a stock’s overbought or oversold.
The indicator reads between 0 and 100. A stock is generally considered overbought when RSI is over 70 and oversold when it’s under 30.
A stock can go above 70 or below 30, so don’t rely on just RSI for entry/exit decisions.
On-Balance Volume (OBV)
This measures the positive and negative flow of volume.
Financial writer Joseph Granville created this indicator in 1963. He felt that dramatic changes in volume without much price action would help predict a significant change in the price…
Some see OBV as useful for spotting upward or downward trends.
How to Identify Support and Resistance Levels
Support and resistance levels are key to understanding a stock’s future action.
A stock finds support at price levels that it doesn’t drop below. A stock has established support when it consistently hits a price point and jumps higher.
It will go lower to establish new support if the original level doesn’t hold up.
Support levels can also become resistance levels … This is when a stock tries to push higher but struggles to break past a certain price point.
Stock Market Trends: How to Identify Trends on Charts?
The trends and indicators above can help you identify where a stock may be heading.
These trends are well-known and highly used for a reason … They’re legit! Learn them.
But remember there are no guarantees. Trends can break down or not turn out as you expect. It’s all part of the process.
Frequently Asked Questions About How to Read Stock Charts
These are common questions from learning how to read stock charts…
How Do You Pick a Stock Based on a Stock Chart?
Use reliable methods for identifying trends. You can take action or move on once you establish whether a stock’s bullish or bearish.
What Are the Best Stocks to Buy for Beginners?
There’s no one size fits all in trading. Start learning, then stick with what works for you. When you’re ready, move on to something outside of your comfort zone.
What’s the Best Stock to Buy Right Now?
I look for big percent gainers with high volume and a catalyst. That changes every day. That’s why you need to think for yourself and build solid watchlists.
What Numbers Should You Look at When Buying Stocks?
If you’re a beginner, focus on price targets. Set your entry, exit, and risk. When you’re ready, you can add in more factors.
How to Read Stock Charts: Learn More
Reading stock charts is a fundamental skill that traders develop and refine over their careers.
One effective way to learn how to read stock charts is by watching real-time price action. That’s why it’s important to have a trading platform with great charting features.
You also need to know what to look for on a chart.
StocksToTrade and Learning How to Read Stock Charts
What’s the most important thing to have if you want to learn to read charts? That’s easy — access to stock charts!
Check out StocksToTrade, an all-in-one stock trading and research platform.
We have awesome charting capabilities and countless other features that can make your trading day so much easier. We have plenty to offer traders — powerful scans, great watchlist features, live news feeds, social media activity, and more.
Don’t just take our word for it … Check it out for yourself. Start your trial of StocksToTrade today!
How to Read Stock Charts: Conclusion
I just gave you a lot to digest. But it’s all important to know.
We teach preparation here at StocksToTrade. That’s why I go live with Pre-Market Prep every trading morning at 8:30 Eastern. Knowing how a chart is shaping up can be the difference between joining the action and missing out.
Do the work. Learning how to read stock charts will help you determine your best trading plans.
What’s your go-to stock chart? How do you use indicators? I’d love to hear your process — share your comments below!