As a trader, the ability to read a stock chart is one of the basic skills a trader should possess. Every intending trader must have a basic knowledge of how to read stock charts. These basic skills help a trader to know the right stocks to buy, and also when to exit and enter a trade. Some new traders find it difficult to read the stock charts and therefore end up making bad trade judgments which end up affecting the profitability of their trades. In this article, we will be focusing on how to read stock charts basics and what to look for.
What is a stock chart?
A stock chart is a graphical representation of the performance and price movement of a stock trade over some time. For instance, A stock chart illustrates the historic performance of the stock, and also the future price of the stock. It helps traders to predict how the stock will perform in the future.
How to read stock charts basics?
Learning the basics of a stock chart is one of the most important things a trader must do. The ability to read and understand the basics of a stick chart will help a trader make good trade decisions, this is because the chart is the eyes of the trader in the stock market. Placing a trade without knowing how to read charts or understand the basics is like walking blind.
Below are a few things to note on a stock chart.
Price to earnings ratio
P/E also known as the price to earnings ratio, is one of the main things to look at when viewing a stick chart. The P/E ratio of a stock is calculated by dividing the current price of the stock by the previous year earnings (four quarters)
Day high and day low
Day high is the highest price generated from the stock trade in a day. It means the highest price recorded by the stock for the day. The Day low is the lowest price recorded by the stock trade in a day. This feature is used to know the highest and lowest price of a stock trade on a particular day.
Open price
The opening price is the first price recorded by the stock immediately after it opened for a particular day.
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Close price
This is the opposite of the open price. This is the price recorded at the end of a trading session on a particular day.
Previous close
The previous price is the price of a stock trade in the last 24hours. That is the price that the stock traded the previous day.
Ticker symbol
This is the symbol of the stock used to outline the stock on the stock exchange. For example, the Apple ticker symbol is (AAPL), and Tesla has a ticker symbol of (TSLA). In most cases, the ticker symbol is always found next to the stock. In some other cases, the ticker symbol is found under a column called the ticker.
How to read stock charts and what to look out for?
Observe the horizontal (time) and vertical (price) lines in a stock chart
Every chart has two lines, the horizontal line, and the vertical line. The horizontal line indicates the time or period specified for the stock chart. This feature can be customized to show the price performance from the period of one day to a year.
The vertical line is the line in the graph that shows the price of the stock. These two lines help traders to follow the trend lines of stock. Additionally, it helps them see how the stock performed during a particular time.
Look out for the trend lines
The trend lines are the blues lines in the stick chart. They help a trader to know the trend of the stock if it’s in a bullish or bearish trend. This trendline is very obvious and it is the main bodywork of the chart.
Trendlines can be viewed depending on the type of chart in use. The trendline is visible in all the types of charts, ranging from the line chart, Bar charts to the candlesticks.
Line charts
Line charts are the simplest charting system in the stock market. It displays only the opening and closing price of a stock.
Bar charts
The bar charts consist of the open, close, high, and low prices of a stock over some time.
Candlestick Charts
The candlestick chart is the most popular charting system in the stock trade. The charting system is mainly used by traders to chart the trends of a stock. This charting system is more complicated than the Bar and line charts because it shows more details about the stock.
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Indicate the support and resistance levels
This is one of the important features of a stock chart. These support and resistance levels are used by many traders to form a trading strategy.
Whenever a stock registers a downtrend or an uptrend the stock practically touches the lines of support and resistance. A support line is a line where the price of a stock regains momentum and begins to trade upwards. The resistance line is the line where the price of a stock stops its bullish run, registers a price reversal, and begins to trade downwards.
The price of a trade touches these support and resistance lines during a market trend. But in a case where the stock pushes past the resistance line, the old resistance line becomes the trades support line, and the stock is predicted to trade higher from that point.
Monitoring the support and resistance lines is the best way to predict the future price or performance of a stock.
Indentify the volume of the trade
This is another important feature to look out for in the stock trade charts.
The volume of the trade is shown on the lower part of the stock chart. The main thing to check out for when monitoring the trading volume is the spikes in the trading volume. This indicates that the momentum of the trade is increasing. If the volume of trade is high and the price of the trade drops, it means that the momentum of the bearish trend is high.
