When you first start as an investor, you may look at stock charts. Most new investors are puzzled how to read stock charts. With some basic help and some practice, you will be able to use them to find the best investments. Charts can help you spot the right time to buy and sell.
Stock market charts are information goldmines that may appear overwhelming at first. Technical Analysis is all about accumulating available information of a stock. Investing in stocks without reading charts is like entering an unfamiliar room blindfolded. In this article, we outline a beginner’s approach to reading stock charts.
1. Trend Line
- Is the stock price steadily rising?
- Is the stock price volatile (and hence, risky)?
- How has the stock fared over past 5-10 years?
Trend lines are best studied with volumes. For this reason, these are often presented in the same chart and we cover it in the next section.
2. Trading Volume
Trading volume shows how many stocks are being traded each day. Stock charts provide this information cumulatively. S&P 500 ETF reports over 150 million stocks traded every day. Penny stocks would have lower trade volumes. Volume charts help investors determine the days of “accumulation” and “distribution”. They reveal the action of institutional investors who buy/sell in bulk. This causes spikes in prices.
To put this in context, if a stock falls 3% overnight, it can concern retail investors. But, low trading volumes indicate large investors are sitting tight over it. Individual investors should not worry at this point. But, a 3% fall combined with large trading volumes would indicate a downhill trend. This is the point where you should book profits or stop loss.
3. Support and Resistance Levels
Stock prices are driven up when there are more buyers than sellers. As demand increases, so does price. There comes a time when market dynamics do not support further price rise. This is called a resistance level. Support level is the opposite – a value below which the demand starts rising and prices pick up. Chart analysis can reveal these values over a period of time. Resistance level is a value that the stock price is looking to surpass.
Support and resistance levels are best analyzed in conjunction with other indicators. It takes time, patience and effort to master. But once learned, this analysis gives you a head-start over other investors.
4. Moving Average
Stock prices are often averaged over a certain period to summarize price movements. This is usually monitored over a few days to weeks. You should be watchful if a stock fails to find support in its 50-day or 100-day moving average. Combine this with high trading volumes and it becomes concerning.
5. Relative Strength line
You would often come across terms like out-performers and laggards. Relative strength line in a chart reveals its performance compared to the reference. S&P 500, NASDAQ, Dow Jones Industrial Average are common references. Out-performers yield better returns than the referenced index and laggards lag behind them. This information is useful while evaluating your portfolio’s performance.
We hope these tips stand you in good stead for identifying quality stocks as well as the right time to buy and sell. Once you have an understanding of how to read stock charts, you can start looking into trading platforms that will provide charting and analysis tools for you. For example, read this review of Robinhood vs E*Trade. Happy trading!