With the recent volatility in U.S. markets catalyzed by the coronavirus pandemic, more and more people have been getting involved in the stock market.
Learning to trade stocks isn’t simple, though, and it makes sense to study up before jumping in.
If you’re completely new to the stock market, one of the first things you’ll want to learn is how to read stock charts.
Let’s take a look at what you need to know.
Important Terms to Know When Reading a Stock Chart
When looking at online trading charts, it might look like understanding it is as simple as whether it’s going up or down. There’s a lot more to learn though before learning how to trade stocks.
Each stock on the exchange has a ticker symbol. While sometimes these can be fairly straightforward, sometimes a stock has a ticker you wouldn’t expect.
Always make sure you learn the right ticker for the stock you’re trading. Otherwise, you might get tied up with a completely different security. For example, the SEC had to suspend the trading of Zoom Technologies (ZOOM) because traders were mistaking it for the video conference platform Zoom Video (ZM).
52 Week High and Low
This is how you can know the highest and lowest point any given security has reached in the last year. When reading this metric, it’s important to know that the previous day’s price isn’t always factored in.
Dividend per Share
Some companies pay out dividends of their profits to shareholders. Not all companies do this, but for those that do, this information is available on the chart.
Related to the dividend per share, the dividend yield is the percentage return on the dividend. This is calculated by taking the annual dividend amount and dividing it by the current price of the stock.
Also known as the price-to-earnings ratio, this is an important metric to take a look at. This is calculated by taking the current price of the stock and dividing it by the earnings per share over the last four quarters.
Daily High and Low
Each day, a stock will reach its lowest and highest point. You can learn what these are by looking at the daily high and low.
The open price is the price that a security opened the trading day at.
The close price is the price that a security closed the trading day at. This can be more significant than the open price for a lot of stocks.
The close price is what determines whether the stock had an upward movement for the day or a downward movement for the day.
The previous close is the price where any given security closed the day before. This can act as a line of support or resistance.
The net change is a dollar value of how much the price has changed from the closing price of the day before. If it has changed for the better, then the stock is up, if for the worse, then the stock is down.
Different Types of Trading Charts
When looking at a stock chart, there are a number of different chart styles to choose from.
This is a simple chart that tracks the movements in a stock’s price with a line.
Bar charts display the open, high, low, and closing price within a given time frame.
Candlestick charts are either green and red or transparent with a green outline and red. Candles display the opening price, the closing price, the high, and the low within a given time frame.
How to Read Stock Charts
Now that you know stock chart basics, let’s take a look at how to read stock charts.
Observe the Time and Price Axes
There are two axes to every stock chart.
The horizontal axis displays the time period. This can be anywhere from minutes to years.
The vertical axis displays the price of the stock. With these two axes, stock charts show the movement of a stock’s price over time.
Look at the Trend Line
The trend line is important but it isn’t the only important metric to consider when reading a chart. If a stock is trending down, it is bearish. If a stock is trending up, it is bullish.
Identify the Trading Volume
Another important factor in stock chart reading is the trading volume. This is usually indicated at the bottom of the chart in the form of red and green bars. How much volume there is can signify how strong a trend is.
Identify Support and Resistance Lines
An additional factor to take into account when reading stock charts is support and resistance lines.
Stocks generally move between lines of support and resistance. Resistance lines are lines that the stock generally doesn’t go above, and support lines are lines that the stock generally doesn’t move below. When a stock moves through one of these lines, it can transition from being support to resistance or vice versa.
These Stock Chart Basics Will Get You Started
If you’re just starting out in the stock market, there’s a lot to learn. Whether you decide to focus on technical analysis, fundamental analysis, or a combination of the two, it’s important to learn as much as possible before jumping in. It can be easy to be tempted to make big plays because of the gains you see others making, but you should remember that people are more likely to boast about their wins than their losses.
Did you find this article about how to read stock charts helpful? If so, be sure to check out the rest of our blog for more awesome content!