How to Read Stock Charts
How to Read Stock Charts
How to read stock charts is a challenge for new investors studying technical analysis. Technical analysts use stock charts to identify patterns that suggest future activity of a stock, rather than measuring a stock’s intrinsic value. They analyze the current market activity based on past prices and trading volume for that stock because they believe that the historical performance of stocks and the markets are indications of future performance. There are three types of stock charts that we will discuss today so that you know how to read stock charts used in technical analysis.
Line charts are the most basic type of chart and they are created by connecting a series of data points together with a line. Line charts are popular among investors who put emphasis on the closing prices instead of the open, high, or low prices. Line charts are used when the open, high, and low data points are unavailable.
Investors who would like to know how to read stock charts using a bar chart need to know that bar charts display the high, low, and close data points. The top of the vertical bar indicates the highest price of a stock traded during the day, and the bottom of the vertical bar indicates the lowest stock price. The closing stock price is displayed on the horizontal line crossing the vertical bar. The closing price is displayed on the right side of the horizontal bar, and the idea is to identify the direction of the trend and to determine if the trend is getting weaker or stronger.
Point and figure charts are another type of stock chart that is used to identify support and resistance levels and chart patterns. This chart does not take into consideration time intervals and only focuses on the movement in price. When learning how to read stock charts using the point and figure chart, little or no price movement is considered irrelevant. Price movements must exceed specific levels on these stock charts in order to be relevant.
Candlestick charts have been in use since the 17th century and they are the most popular stock chart used in technical analysis. Investors consider candlestick charts to be the easiest type of chart to read. They find that they are more visually appealing than the bar, line, or point and figure charts. Candlestick charts are used in Japanese candlesticks analysis and the relationship between the opening and closing prices are analyzed. These charts contain the high, low, open, and close data points for a stock each day over a specific time interval. Technical analysts who study candlestick analysis use candlestick patterns in order to detect the price action that is indicative of selling or buying pressure. When learning how to read stock charts using candlestick charts, traders learn how to block out the market noise experienced when using bar charts, and they are better able to determine market sentiment. Many investors also prefer using Japanese candlesticks charts because they are leading indicators.
Additionally, investors can confirm price movements on candlestick charts by using moving averages. In fact, top traders recommended combining Japanese candlesticks with moving averages and they believe that it will increase your chance of profitable trades.
Japanese Candlesticks are the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the various Candlestick Patterns. Combine these with your favorite Technical Analysis indicators and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or Exchange Traded Funds.
