Using stock charts, which are numerical charts, one can gain insight into the movement and behavior of stock prices. A trader can learn a lot from studying the trading chart of a stock to determine whether or not to invest in it.
Regardless of the asset being traded, charts are an essential part of the trading process and a primary tool for technical analysis.
Stock charts are graphs of market data that go back in time. Traders are able to better recognize and comprehend price patterns with the aid of the graph patterns.
This then contributes to our understanding of whether the stock will engage in bull, bear, or range trading.
If you’re just getting started in the world of stock trading, here are some basics on how to read and interpret stock charts.
Observing Trend Lines
The trend line is the line drawn to represent the general direction of a security’s price movement. When plotted on a chart, the trend line also displays the stock’s price history.
If the stock price is going up and the trend line is sloping upwards, then the stock is doing well; if it’s going down, then the stock is doing poorly.
Range-bound markets, in which prices move in narrow bands rather than making large, sustained moves, are also reflected in stock market price action.
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Spotting Support & Resistance
Locating the points of current support and resistance: The support and resistance lines are somewhat arbitrary, as they are dependent on the viewpoint of the trader.
Investors’ investment horizons, or the length of time they intend to hold onto the shares, inform their decisions regarding where to draw the support line and where to place the resistance line.
The support line can also be calculated by finding the lowest price that was close to that line during the specified time frame. The resistance line would be the highest price within the specified time frame that came close to touching the line.
Finding the Dividends & Stock Splits
Dividends and stock splits can be tracked by looking at the bottom of the graph. And the same holds true for a stock split. When the company’s management or board of directors decides to distribute some of the company’s profits to the shareholders, this is called a dividend.
In the event of a dividend, the trader who owns a portion of the company’s stock will receive a small share of the profit.
Observing Historic Trade Volumes
Observing past trading volumes is done by looking at the many thin, vertical lines near the bottom of stock charts. This indicates a general movement in the trading volume of a company’s stock.
The trading volume typically rises in response to positive news and falls in the face of negative news.
KEY PHRASES
- Open indicates the price of a stock when the exchange had opened, that is, trading had resumed.
- High generally refers to the highest amount the stock had reached for the day while Low refers to the lowest price.
- Market capitalisation denotes “the number of outstanding shares multiplied by the stock’s current price”.
- Price to earnings ratio refers to the price of the stock when divided by the earnings per share.
- Dividend yield is the annual dividend payments divided by the market cap of the stock.
- Previous close refers to the price of the stock the previous day when the market had closed.
- 52-week high and 52-week low refers to the stock’s highest and lowest trade price over the last year respectively.
Trading stocks requires careful consideration of both fundamental and technical analysis. A stock’s response to major news and other factors can be tracked using stock charts. That’s why they’re called “indicators” — they’re what traders use to formulate actionable plans.
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