Sound trading decisions must be based on reliable data. In pursuit of this data, traders refer to various charts and perform what is called technical analysis. Technical traders believe that understanding price patterns is crucial for predicting future price moves. In this article, you will learn about common chart types and their components to master the basics of stock chart analysis and enhance your trading strategy.
What is a Share Market Chart?
Technical charts are tools that allow traders to spot the security price differences across various periods of time. They exist in the form of graphs that show the price of a stock over a specific timeframe, for example, one year. A timeframe is usually selected according to personal goals – larger timeframes for investments and smaller ones for trading.
Where to Find Stock Market Charts?
Anyone considering buying stocks should refer to the price charts of the company they are interested in. One can view charts in a broker’s trading platform they are trading with or in such services as Google Finance and Yahoo Finance.
What Can We Learn from Charts?
The information can be presented in various forms on the chart. Different charts will give you different data. For example, the simplest charts will show you the current price of a stock and its historical performance, helping you identify the trend clearly. More advanced charts will provide information about the trading volume of a stock, dividends, and other important information.
Open and close. The open is the price at which a stock begins trading, while the close is the last price of the previous trading day.
High and low. High and low are the highest and lowest prices of the stock within a trading session.
Market cap. Market cap or market capitalization measures the size of a company based on the price of all shares issued by the company.
PE ratio. PE or price-to-earnings ratio is a measure used to decide if a stock is undervalued, overvalued, or fairly valued.
Dividend yield. Dividend yield shows the amount of money an investor may receive annually in dividends. The dividend yield is expressed as a percentage of the current share price.
52-week high and low. The 52-week high is the highest price of the stock within the previous 52 weeks. Conversely, the 52-week low is the lowest price of the stock within the last 52 weeks.
Volume and average volume. Volume is the number of shares traded in a day, while average volume is the average number of shares for a specified period.
Types of Share Market Charts
There are four common types of technical charts used by stock traders:
- Line charts show the lines formed of connected daily closing prices. Being a very basic type of chart, it is used primarily by people who believe that closing price is the only thing that matters.
- Point and figure charts consist of X and O symbols, where Xs signify that the price goes up, and Os that the price goes down. Although point and figure charts are rather minimalistic and ignore such important data as time and volume, they can help long-term investors identify trends and reversals.
Candlestick charts show opening price, closing price, high of the day, and low of the day. A
single candle consists of a "real body," illustrating the difference between the opening price and the closing
price. The vertical lines coming from the body are known as "shadows." Shadows show the price range from high to
low. The candle is white (or green) if the close price is higher than the open price. Conversely, the candle is
black or red if the open price is higher than the close price.
- Bar charts show the same data as candlestick graphs but in a different way. A vertical line illustrates the day’s trading range. A horizontal line pointing left shows the opening price. A horizontal line pointing right shows the closing price.
How to Read a Stock Chart?
The Elements of a Candlestick Chart
Let’s review the structure of a candlestick chart.
- 1. In the upper left corner of the chart, you can see the ticker symbol (stock symbol) of an asset. MA is a stock symbol of Mastercard.
- 2. M15 means that you are looking at a 15-minute timeframe. You can select daily, weekly, monthly, or even yearly timeframes.
- 3. The next thing you see are four prices: open price (356.59), high of the day (357.05), low of the day (355.04), and close price (356.39).
- 4. At the bottom of the chart, you can see the time axis. You can quickly check what the price was on the exact day and time in the past by drawing a vertical line up from that specific day and checking what is on the price axis.
- 5. The right side of the chart shows the asset’s price.
How to Read a Chart?
Now that you know chart components and understand related terms, let’s take a look at the Tesla stock chart. We will start with identification of an overal direction of the price or simply a trend. With just a quick glance at the chart, you can draw the conclusion that the stock is in a downtrend. Although a downtrend might not urge one into investing, there could be good opportunities for short-selling strategy or intraday trades.
You can also see whether the stocks are heavily bought or sold by larger investors. Unusually large spikes in volume indicate that big players have been buying (white candles) or selling (black candles) a large number of stocks. On the flip side, a small trading volume will mean low activity of institutional investors in the market. Why is volume important? It helps you confirm the trend. In other words, the larger the volume is, the more sustainable price move will be.
Lastly, by reading a stock graph, you can see whether the price finds a support/resistance level and, subsequently, whether you should enter/exit the trade.
Read more: Price Action Trading Guide
You can draw trendlines on charts connecting a series of prices together. Trendlines are lines drawn over highs or under lows of a price to show its prevailing direction. Looking at a trendline, we clearly understand where the price is going, whether it is an uptrend or downtrend. Trendlines will show the overall direction of a given stock more clearly. What is more important, they can help to define support and resistance levels.
Support and resistance levels set on the charts predict where the price is likely to stop and reverse. Traders employ these levels in order to determine whether it is time to enter/exit a trade. In a downtrend, each lower low will mark a support level and each lower high will mark a resistance level.
Stock charts are even more helpful in combination with technical indicators. The indicators can give even more detailed information about stocks. The most common tools to complement a trader’s analysis are the Moving Averages, as well as the ADX and the MACD, etc.
Read more: Best Stock Indicators
Being able to understand stock charts is crucial for anyone who trades or invests in the stock market. Technical traders employ charts to analyze market data to find the best entry and exit points for their trades. There is a selection of timeframes that enable you to see the price action of a stock throughout the time period you are interspersed in. Checking with stock charts to identify trends, volume, as well as support and resistance levels may contribute greatly to your success.
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