Planning to invest in stocks to build wealth? It begins with taking the first baby step—learning how to read a stock chart. Understanding a stock chart is basic to stock investing.
What is a stock chart?
A stock chart is a price chart of a particular stock of a company or an index, plotted across time. On the X-axis is the time frame (intra-day, daily, weekly, monthly or yearly) and on the Y-axis is the price of the stock. It also represents other pieces of information that you will need to get the full picture of how a particular stock is doing in the market.
Why should you know how to read stock charts?
To invest in stock markets without knowing how to read stock charts is like shooting in the dark. You need to ace the art of reading stock charts to
- pick the winning stocks in due course of time,
- be able to buy them,
- know when to sell a stock
- know if the stock is being sold fast or if it is in demand (being aggressively bought)
- study the trends in price movements of stocks-if they have been volatile or steady or if they have plateaued at particular price points.
Source; Yahoo! Finance
How to read stock charts?
You can start by looking up a particular stock, for example, ITC.
- Stock symbol and exchange
On the top left you will find the name of the company, its stock symbol (also called the Ticker), and the name of the exchange on which the share trades.
- Chart period
The stock chart gives you the option to study the movement of the stock price over time, ranging from intraday to weekly, monthly, yearly and multi-year data. Commonly, traders look for daily and intraday data to learn about price movements in the short term. Since stock markets are volatile, investors usually look at such charts to decide whether they want to buy a particular stock immediately or hold off for a few days. To spot trends in the long term, they look at monthly or yearly data.
- Price changes
On hovering the mouse over the ticker symbol, you will see critical data about the stock’s trading activity in the day, called the OHLC data.
- Day’s Open: is the stock price when trading begins.
- Day’s Close: is the stock price at the end of a trading day.
- Day’s High: is the highest price of the stock during the day.
- Day’s Low: is the lowest price that the stock traded at during the day.
- Net Change
For a daily stock chart, the net change in the stock price and percentage change is shown in green or red, depending on whether the price rose or fell from the previous trading day’s closing figure. So in the image, +0.10 is the gain in the stock price of ITC from the previous day’s closing, and +0.04% is the percentage gain.
You can find the primary information plotted in the form of a line (generally the plotting line indicates only the closing price), a bar chart (plotting the OHLC data for each day) or candle and stick charts.
Line chart (Source: Yahoo!Finance)
Chart with candles and sticks (Source: Yahoo! Finance)
A candle and stick chart gives you a glimpse of how much the prices moved each day. In this type chart (shown above), the candles represent the range (closing and opening) of price movement in the day. So if the candle body is long, you know there has been significant price movement, and if the candle is shorter, it shows the prices have moved in a tighter range. The green candles show that the closing price of the stock was higher than its opening price, a net gain in stock price. A red candle signifies a net drop in the stock price from the opening.
Another vital data point is volume. In a simple daily stock chart, you can find trade volumes by hovering the mouse on a particular trading day.
In a daily chart, the volume is the number of share units of the stock traded. It reflects the demand for the stock at a particular price point. If trades are less, then it means there isn’t much interest to buy or sell the stock at the said price point. If trade volumes are high, it indicates active participation of buyers and sellers.
Reading Price And Volume in The Right Perspective
You have to read price movement in the context of the change in volume. They both go together, in understanding a stock chart. If there is a considerable price change, before acting on it, you must look at the volume. It may be that the price change is due to an anomaly or a one-off factor and not due to aggressive buying and selling. But if the price change is accompanied by a significant increase or decrease in volume, then it gives you a more realistic picture of actual buying or selling of shares by large investors.
For example, let’s assume there is a 3% drop or 3% gain in the price of a stock from the previous day. This information alone may get you jittery. But if you see the trading volume has been below average, then you know it is a one-off change and that the big investors are still sitting out.
Reading the trend line
Those trying to learn how to read stock market charts may wonder what the blue line is all about. The blue trend line in the image above, full of crests and troughs, shows the real price movement over time. When you notice particular sustainable trends in the price movements of a company’s stock, you must dig deeper to know if there were specific events or news triggers to explain the shift. The developments could be company-centric, economy centric, due to global macroeconomic factors, or broadly reflective of a bearish (subdued sentiment) or bullish (upbeat) market, among other essential triggers. This will help you make a calculated decision on buying or selling the stock.
To know how to read technical charts, you can also select technical indicators like the moving average lines by clicking on ‘indicators’. The moving average lines tell you how the closing prices averaged over time, like a 50 Day or 100 Day moving average.
Knowing the support and resistance for stock prices
Source- Yahoo! Finance
Stock charts are a great visual tool for you to see the support and resistance levels for the stock price. Generally, you will see, even though the stock prices have moved up and down, they may follow a price band within which they are moving or find support. On the higher end, you will find, stock prices do not breach past a certain price level for some time before a vital event trigger pushes the stock prices to breach those resistance levels. On the lower end, the stock prices find support at some level. The stock prices may touch the support levels multiple times before falling below those levels due to some critical event or cause.
For example, in the above chart, the ITC stock prices found support at 245.95 and resistance at 240 in August-September 2019.
In a nutshell, you could say, a stock chart at its very basic is a visual presentation of the demand and supply of a stock in the market represented through price movement over time. When you have learned how to read a stock chart well, you can play around with the various technical indicators to spot trends, buying and selling patterns, both a worm-eye and hawk-eye view of the market sentiment in the stock market. This will help you make well-informed forecasts about stock performance and pick the winning bets.