How To Read A Stock Chart Step By Step Beginner S Guide

How to Read a Stock Chart?

A stock chart is a pictorial/ graphical representation of a stock price plotted for a period, i.e., daily, weekly, monthly, yearly, etc. It contains items like stock symbol, stock exchange details, price details like open, close, highest, lowest, etc., and trade volume details, i.e., the quantity of stock bought and sold, providing insights about the direction in which stock will be moving.

The essentials of the stock chart need to break down. Then, one should focus on key things by reading the stock chart.

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Key Takeaways

A stock chart is a graphical or visual representation of the stock price plotted over a specific time frame, such as daily, weekly, monthly, or yearly.A stock chart includes stock symbols, stock exchange information, price information such as open, close, highest, and lowest, and trading volume information, i.e., the quantity of stock purchased and sold, which helps predict the direction in which a stock will move.The stock chart types are line stock charts, high low, close bar close charts, open high low, close bar stock charts, Japanese candlestick charts, volume at price stock charts, and equivolume stock charts.

Step 1 – Identify the Trend Line

One can see the orange line every time the stock chart goes up or downright. A stock may take huge dives and/ or do huge climbs. But, an investor or trader should not react to large drops or huge gains in negative or positive ways. Rather, one should use this line trend to understand what is happening in the market regarding a particular stock. This trend line helps one to analyze further. Any news related to stock will come and go. Still, when the announcement news coincides, there is a dramatic shift in the trend lineTrend LineA trend line, often known as the best-fit line, depicts the data’s trend. It shows the overall trend, pattern, or direction based on the data points available.read more that needs attention. Therefore, one should use the trend line to invest in stocks as a high indicator line. Therefore, the trend line should be used to invest in stocks as a high indicator line.

Chart 1

XYZ’s stock price was trading normally, and suddenly on the fifth day, any negative news, say virus entry in the trading country, just got on the TV. Accordingly, the market started reacting negatively to it.

Step 2 – Look for Lines of Resistance and Support

The next step is to read a chart of the resistance and support lines. The levels are the price at which the stock remains for a particular time. The support levelSupport LevelSupport level (SL) refers to a point in the securities trading below which the price of the security does not fall.read more is a cost below which stock is improbable to fall. In contrast, the resistance level is the level or price above which a stock price is unlikely to go. The resistance and support level is unlikely to change unless there is a drastic shift in the market, like lower marginal profit. A stock price bounces back and forth between the inflated barriers of support and resistance. The main purpose of resistance and support is to know when to buy and sell a stock. These levels are subjective and can be interpreted differently by different individuals. If a stock holds on for a long time, support and resistance lines may not be very important, but these lines may be crucial for a short-term investor.

Chart 2

As visible here, red lines are different resistance and support levels over ten days.

Step 3 – Know when the Dividend and Stock split occurs.

At the bottom, in a stock chart, one can see if and when the company has issued a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more and a stock splitStock SplitStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. read more. When the company’s Board of DirectorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more opts to provide its earnings share to its shareholders in dividends, the shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more earns a marginal profit through this dividend. Although all companies do not issue dividends, this should not interpret as not worth investing in if any company does not issue dividends. They consider plenty of other factors. Like some companies prefer to reinvest their earnings rather than give them back to the shareholder, such companies focus on growth.

The company’s board of directors strategically does a stock split to issue additional shares to the public. It does not change the value of the company but changes its price. Generally, companies go for a stock split if the price is not in line with a competitor or attract small investors when the share price decreases.

Chart 3

Here, on day 5, the company announced a dividend payableDividend PayableDividend payable is that portion of accumulated profits that is declared to be paid as dividend by the company’s board of directors. Until the dividend declared is paid to the concerned shareholders, the amount is recorded as a dividend payable in the head current liability.read more. After that, stock prices rise as the stock starts trading at a cum-dividend price.

Step 4 – Understand Historic Trading Volumes

At the bottom of the chart, multiple small and vertical lines show the trend of stock traded volume. Any major news about the company, whether good or bad, increases the trading volume. An increase in volume may also shift the price of the stock quickly.

Chart 4

In the above example, the company announced a dividend, and accordingly, one can easily identify a spike in traded volume in the below chart.

Types of Stock Chart

The following are the basic types of stock charts: –

Line Stock Charts: One of the basic charts gives the least information. The line is drawn using the closing price for each unitPrice For Each UnitUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.read more of time.High Low Close Bar Stock Charts: Each bar represents the trading period, with the price being high, low, and close represented.Open High Low Close Bar Stock Chart: This illustrates a complete bar chart that includes the open price and close price in the day’s trading.Japenese Candlestick Chart: It is widely used in Japan that gives an excellent insight into the current and future price movement.Volume At Price Stock Chart: This is the new development in the stock chart that shows the volume of trades at a specific price level.Equivolume Stock Charts: These charts provide the volume at a price differently.

Stock Charts Volume

Stock chart volume is the number of shares traded during a time. It is plotted as a histogram under a chart where volume represents the level of interest. If a stock is trading low in volume, there is low interest in the stock market and vice versa. It also describes the liquidity constraint in a stock. Low volume refers to illiquidityIlliquidityIlliquid refers to an asset that cannot be converted to cash. Such assets suffer a valuation loss when sold in exchange for cash. Bonds, stocks and properties are some examples of illiquid investment.read more, and one can interpret high volume as stock possessing high liquidity. Swing traders use it.

Stock Chart: Resistance Levels

The resistance level in stock charts is the price from which there is no further rise. It is always about the current market price Market PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more. It is a point on the chart where the traders will expect maximum supply for the stock. It is a technical analysis tool that market participants look at the time of the rising market. It is unlikely that the stock price will rise above the resistance level, consolidate, absorb all the supply, and then see a high decline.