Whether you’re a newbie investor/trader or somebody who has been doing stock investments for a while, you can never go wrong with equipping yourself with the right tools to be successful in the trade. One is the ability to understand and read stock charts.
Just the Nuggets
- Stock charts are important tools for you to become a better investor, by telling you a story and helping you understand how your stocks are performing.
- The three basic stock charts are the line charts, bar charts, and candlestick charts.
- Some of the different patterns of candlestick charts are the marubozu, doji, shooting star, and inverted hammer.
Importance of Stock Charts
Charts have a story to tell
They show the trend—upward or downward—a stock is taking over a specific period. They tell you about a stock’s behavior—if its price is appreciating or depreciating and at what rate of increase or decrease, as well as the volume traded during a certain period.
They’re much like a patient’s X-ray or MRI results to a doctor
Charts help you assess the status of the stock and its performance. It allows you to have a more technical analysis of the potentials and opportunities of investing and trading in the stock market and also helps you analyze the performance of your stocks and discern when there is a possibility of a reversal (both upward or downward). As a result, you can formulate strategies to put yourself in the best position to better manage your stock holdings.
Charts help you avoid investing blindly
Without the help of stock charts, you’ll act like you’re blindfolded—you can’t see what’s really happening with the stock you are interested in or even invested in. So you might put yourself at a disadvantage with your misguided investment decisions. That’s why stock charts exist for you to analyze whether you should hold onto your stocks and invest more, or consider shorting and reduce your holdings, or completely exit the trade.
Types of Stock Charts
1. Line Chart
A line chart is usually what comes to your mind when the word chart is mentioned. It is a simple and easily understood chart used by market analysts.
Also called a closing-only chart, it is used to show a stock’s closing price each trading day of a specific period.
How to Read a Line Chart
A line chart is composed of an x-axis, y-axis, points, and a line.
The x-axis (horizontal) represents the time period, which could be in days, months, quarters, or years.
The y-axis (vertical) represents the price per share of the stock or the volume traded on a specific date.
The points represent each price per share or volume traded corresponding to their respective dates. They’re basically the points where the x-axis and y-axis intersect.
The line is used to connect the points to show the price trend of the stock. If the line is going up, it represents an increasing trend of the stock’s price. Conversely, a downward trend shows a continuing decrease in the price.
Let us take this chart, for example.
This line chart shows the actual closing prices of Apple Inc. Common Stock (AAPL) for the trading period starting from September 21 up to October 19, 2020.
This can help you ascertain AAPL’s behavior in the market—whether its price is going up or fluctuating or if there is a continuing downward trend. Furthermore, it aids you in identifying barriers to its price.
2. Bar Chart
A bar chart is just like a line chart. It also consists of an x-axis representing the time period and a y-axis representing the price per share of the stock or volume traded on a specific date. But instead of points or dots, vertical lines or bars are drawn instead.
Bar charts are used in two ways by the stock market.
First, it is used to show the Open, High, Low, and Close (OHLC) price points of the stock for the day.
The top of the vertical line shows the highest trading price while the bottom shows the lowest trading price for the day. The left and right horizontal lines signify the open and close prices, respectively.
The open price is the price of the stock at the opening of the stock exchange for the day. Conversely, the close price is its price at the close of trading for the day. When all four are shown, the chart is called an OHLC chart. Thus, the chart tells you four things at a glance.
However, some charts do not show an Open Price line (HLC Chart). As you can see, there are no horizontal lines on the left side of the vertical lines.
Second, it is used to show the volume traded for the day. It is the number or quantity of shares of a company’s stocks sold or bought on a specific date. The chart this time shows a series of bars.
How to Read a Bar Chart
Let’s take the same Apple Inc. Common Stock as an example.
The upper part of the chart shows the OHLC chart, while the bottom chart shows the volume traded for the day. Now, let’s take a closer look at the leftmost bar of the OHLC chart.
It shows that:
- Open Price – $112.89
- Close Price – $113.02
- High Price – $115.37
- Low Price – $112.22
- Volume Traded – 144
Thus, the chart helps you define the trend your stock is taking and identify the best time to enter or exit the trade.
3. Candlestick Chart
A more visually appealing chart, the Japanese candlestick chart interestingly dates back to the 17th century. It provides a more graphic way of showing the movement of stock prices throughout the whole trading day. For stock traders, the candlestick chart provides information even on an hourly basis.
As the name implies, you can see candlesticks instead of bars or lines.
The wide, rectangular part of the candle is the real body while the lines extending from the body are called the shadows or candlestick wicks.
Similar to an OHLC chart, the candlestick chart incorporates market psychology into the presentation. By using colors (light and dark), the chart shows how the stock is performing.
How to Read a Candlestick Chart
Just like in a bar chart, you can also see the four price points in a candlestick chart. The body represents the range of the open and close prices. The highest point of the upper candlestick wick is the high price, while the lowest point of the lower candlestick wick is the low price.
A white or green candlestick signifies that the close price is higher than the open price (net price gain). On the other hand, a red or black candlestick signifies that the close is less than the open price (net price decline).
A marubozu pattern is a candlestick without upper and lower wicks or shadows. It may be short or long.
A white marubozu shows that the open price is equal to the low price. It also shows that the close price is equal to the high price of the day. A strong upward trend is indicated by this pattern.
A black marubozu shows that the stock’s open and high prices are the same for the day. Also, the close price is the same as the low price. A strong downward trend is thus indicated.
However, if both the close and open prices are roughly the same, the candlestick will not seem to have a body at all. This is called a doji pattern, which basically looks like a cross. It signifies a transition in the stock’s trend; thus, a possible reversal in its price direction is to be expected.
A doji pattern after a long uptrend is an indicator that it could be the best time to scale back on investments in the stock or exit your position.
On the other hand, a doji after a long downtrend signifies that it is the best time for you to reduce the size of your stock holdings or completely exit your trading position.
3. Shooting Star
This candlestick pattern reveals a bearish reversal of the stock’s trend. A bearish reversal means that an upward (bull) trend of the market is beginning to move in the opposite direction and prices are starting to fall.
The shooting star formation occurs when the open, close, and low prices are approximately similar. In addition, the candlestick has an upper shadow or wick that is, at least, double the body’s length.
4. Inverted Hammer
The bullish version (reflecting an upward trend) of a shooting star pattern is the inverted hammer.
Same as the shooting star pattern, it also shows a long upper shadow and an almost similar open, close, and low prices.
This pattern, usually occurring at the end or bottom of a downtrend, warns the investors that an upward reversal is about to happen.
Elements of a Stock Chart
Now that you’ve been acquainted with the different charts and how to interpret them, you may ask yourself what the other information or details on the stock chart mean. This is especially true when you open the stock exchange, your investment firm, or any finance website.
Although the layout may vary, the stock chart that you see when you open the NASDAQ, NYSE, or any finance website will basically show you the following:
- Company Name
- Ticker or stock symbol – In this case, AAPL.
- Exchange – This is where the stock is traded—in this case, NASDAQ.
- Chart period – You can show 1-day, 5-day, 1-month, 3-month, 6-month, year-to-date, 1-year, or all (since the stock’s initial public offering).
Daily charts are usually used in forecasting price movements in the short term. Weekly or monthly charts are used to identify and forecast long-term trends and price movements.
- Price Change – This has two sections. The first shows the closing price at the end of the previous day’s trading and its net change (in USD and %) over its preceding day’s close price. The rightmost numbers show the same data in real-time as it is happening on the trading floor.
- Volume – If the stock movement is low, it shows that only a few people are currently trading. It also means that this trend is unlikely to continue.
When the movement of the stock is high, this means that there are many traders and investors engaged in the exchange at its current price. This trend is likely to continue. Thus, it will be easy for you to buy more stocks or sell them.
If the stock has established a stable trend but experiences a spike in volume, it can be a sign that the stock’s trend is about to change.
Stock charts may confuse you at the start. But once you’ve learned the basics, you can easily analyze a stock’s performance and come up with strategies in growing your investments. So be sure to equip yourself with the ability to read charts as it has been said that:
Our References and Further Readings