Learning to read and understand a stock chart is one of the primary initial steps before investing in the stock market since stock charts are an essential part of stock analysis.
This article will introduce you to all the stock chart basics that enable you to quickly draw a lot of information about a stock’s past performance and some clues to its possible future price action.
Even if you’re an absolute beginner, prepare to become an expert on how to read a stock chart. We’re going to get you there in five easy steps.
What is a Stock Chart?
A stock chart is simply a visual representation of the movement of a stock’s price over a given period of time. A chart lets you customize the timeframe over which you choose to analyze stock price changes.
- Tick Charts: Tick charts are mainly used by high frequency traders. They visualize every single price print from the times and sales.
- Minute Charts: Minute charts are mainly used by day traders for day trading short-term momentum stocks.
- Hourly Charts: Hourly charts break down a stock’s price movement into intraday segments like the 1-hour or 4-hour chart and are commonly used by swing traders.
- Daily Charts: Daily charts are the most frequently used chart types for longer-term swing trades and investing. The same goes for the weekly and monthly charts.
You can choose timeframes for viewing and analyzing stock price movement anywhere from the tick-by-tick time frame, over the one-minute timeframe to a monthly timeframe.
Some advanced charting platforms enable you to customize a chart using uncommon timeframes. So, for example, if you happen to want to view the stock price action as it occurs in seven-minute segments, you can set up your chart to do that.
Where Can You Find Stock Charts?
Step one is having a chart to look at, so the first thing you need to know is where you can easily find stock charts.
First, you can find free stock charts at basic financial information websites such as Finviz, Yahoo Finance and Google Finance.
You bring up a chart of the stock you want to look at by putting the stock symbol into a search box that’s usually located at the top of the page. Stock symbols show the primary trading exchange the stock is listed on – such as the New York Stock Exchange (NYSE) and the symbol for the individual stock.
For example, the symbol for Amazon stock is AMZN. Amazon stock trades on the NASDAQ exchange, so it will typically appear as NASDAQ: AMZN.
Don’t know the symbol for the stock you want to analyze? No problem. Just put in the company name, such as “Apple,” and the stock charting service will bring up the symbol for you.
Several other websites allow you to access stock charts with delayed intraday quotes or daily time frames for free. One of the most popular and widely used is TradingView.com. Your brokerage firm, such as TD Ameritrade or E*TRADE, will also provide you with a stock charting platform.
Now let’s examine some of the information that the chart provides by taking a quick look at a daily candlestick chart of Tesla Inc. stock (NASDAQ: TSLA) by using TrendSpider.
How to Read Stock Charts: Visualization
Now let’s get into how to read a stock chart step by step by looking at a sample chart of Tesla (TSLA).
Stock Symbol, Name, Open High Low Close
Across the top of the chart are shown the stock symbol TSLA, then the chart type and time frame. In the next line, you find the name of the stock and the open, high, low, and last price. Once the stock market closes, the last price is the closing price of the day.
Price Visualization
Various types of charts can be used to visualize the price per share – for example, bar charts, point-and-figure charts and the by far the most frequently used candlestick chart.
Candlestick Chart
Each candle on a candlestick chart consists of four elements – the stock’s opening, closing, high, and low prices for the chosen timeframe.
There are three basic components of a candlestick: the body, the upper wick, and the lower wick. The “wick” is sometimes referred to as the candlestick “shadow” or “tail”.
The body is formed by – and reflects – the price movement that occurred from the opening price to the closing price of the time period.
The upper and lower shadows, or wicks, are lines that show price movement that occurred outside of the price range that extends from “open” to “close.”
Charts commonly color-code the candlesticks to quickly indicate whether price advanced or declined between the open and close.
Typical color schemes used are green for “up” candles – where the stock price closed higher than it opened for the period – and red “down” candles – showing periods when the closing price was lower than the opening price.
Indicators plotted on the primary charting area
Moving Averages like the color-coded ones in the sample chart are typical indicators plotted on the main section in parallel to the price visualization like candlesticks.
In our example, the MA(50) line is the blue line; the MA(200) is the yellow line.
Also given are the current figures for the moving averages. For example, the current 50-period moving average of the stock’s price is 798.82. Moving averages of a stock’s price are a frequently used technical analysis indicator.
It’s common for investors to apply both a short-term and long-term moving average to a price chart. The relationship between the two MAs is used to indicate the current and probable future price trends.
When the shorter period moving average line is above the long-term MA line, that indicates that the stock is in an uptrend. Conversely, a downtrend is indicated when the short-term MA is below the long-term MA.
If the short-term MA crosses the longer-term moving average, then this is interpreted as signaling a trend change, or market reversal, from a downtrend to an uptrend, or vice versa.
Note: The moving averages of a stock price that are considered the most important ones market analysts and stock traders are the 10-, 20-, 50-, 100-, and 200-period MAs.
Indicators plotted on separate areas of a chart
Most indicators are overlaid in the main chart window; however, some stock chart components are usually shown in a separate area of a chart.
Volume of shares traded per period
Along the bottom of the main chart window, the level of trading volume for each time period is shown. Note that there is considerable variation in the amount of trading volume, with some periods having extremely high volume and others relatively low volume.
Most traders consider trading volume an important technical indicator when they read stock charts. Price moves that are accompanied by very high volume are considered more significant.
Relative Strength Index
A separate window below the main chart window for this chart is labeled Relative Strength Index (RSI). The RSI is a popular but just one of many technical analysis indicators that can be applied to a chart.
MACD
Below the main chart window is another separate window showing another commonly used technical indicator, the MACD (moving average convergence divergence).
A Second Look at Stock Price
Let’s look at Tesla’s price movement again, this time with a couple of different technical indicators on the chart:
We’ve changed the moving averages charted – from the 50 MA and 200 MA – to using a 10-period MA as the shorter term moving average and the 50 MA, which was the short-term average shown on the chart previously, as the long-term MA here. Note that as Tesla’s stock price moves up more rapidly and the distance between the short- and long-term moving average increases.
This increase in divergence between the moving averages indicates a stronger uptrend. In contrast, if the distance between the two moving average lines begins to collapse, that’s a sign that the trend is weakening.
Additionally, we’ve applied the ATR – Average True Range – indicator in a window below the main chart. The ATR measures the average daily trading range and serves as a gauge of stock price volatility. Increasingly wider trading ranges indicate higher volatility; contracting trading ranges indicate a decline in volatility.
How to Read Stock Charts: What a Chart Tells You
In addition to showing whether a stock is generally in an uptrend or downtrend, stock price charts are most frequently used to identify support and resistance levels.
Investors are looking to buy near recognized price support levels and sell near price resistance levels. Looking back at the chart above, you can see that the 50-period moving average reflects a support level during the period of time covered roughly in the middle of the chart.
Note how the stock price several times retraced downward to the 50 MA line but always turned back to the upside, resuming and extending the existing uptrend from there.
An investor wanting to buy Tesla stock at a favorable price, and who took note of the first couple of times that the 50 MA line acted as price support, might look to enter the market the third or fourth time that there was a pullback in price to around the 50 MA price level.
Buying near a recognized support price level enables an investor to limit their risk – as they can place a stop-loss order just a little below the support level.
The violation of previously recognized support or resistance levels is usually interpreted as a significant event.
If, for example, a stock breaks out above a price level that had previously always acted as resistance – turning price movement back to the downside – that’s interpreted as an indication that the stock is likely to move substantially higher in price.
Additionally, a price resistance level that is violated by price moving above it often acts as a price support level as the stock moves higher.
As the uptrend becomes more pronounced, the shorter term 10-period MA becomes a more accurate reflection of where price support exists.
Analyzing Stock Market Price Chart Information
There are hundreds of different technical indicators that stock investors may choose to apply to a chart, but they all serve one or another of the following basic purposes:
- Identify the existing trend: Is a stock in an uptrend, a downtrend, or lacking a clear direction – that is, trading with little change in price either up or down? Common trend indicators: moving averages, trend lines, Bollinger bands
- Assess trend strength: Once the trend is identified, traders then want to get an idea of how strong the trend is and, thereby, how likely it is to continue. Trend strength indicators: MACD, RSI, ADX (average directional index)
- Recognize trend changes: Investors also want to get indications of any possible impending trend reversal that will turn a stock’s price movement in the opposite direction. Technical indicators to identify possible trend changes: candlestick reversal patterns, MACD, moving average crossovers a (short-term moving average crossing over to the other side of a long-term moving average)
Additional Stock Price Information
Usually appearing above or below a price chart, there is additional information about the stock and its price movement.
Among the important figures that may be found are the following:
- Previous closing price (from the most recent trading day)
- The highest and lowest prices the stock traded at during the last 52 weeks (one year)
- Market capitalization – Market cap measures a company’s size or value as reflected by the current price of its stock shares multiplied by the total number of outstanding shares. Based on its assets and liabilities, the company’s actual intrinsic value may be higher or lower than its market cap value. The market cap value most precisely reflects what the financial perceive the company to be worth.
- Average daily volume (the average volume figure reflects the average number of shares traded each trading session)
- Earnings per share (EPS) – The company’s most recently reported income, divided by the number of its outstanding stock shares. EPS is a key financial metric that market analysts and investors watch closely. An EPS report that comes in significantly higher or lower than what market analysts had projected can dramatically impact a company’s stock price.
- Dividend Yield – If the company pays dividends to its stockholders, the amount of dividends paid out annually is shown in the form of the dividend yield – the annual dividend payout expressed as a percentage of the current share price.
Financial Metrics
Frequently shown below a stock chart is an extensive list of what are referred to as “financials.” These are various financial measures or metrics for a company that market analysts and investors utilize as additional indicators that can be used to assess the value of a stock and to determine whether the stock is perhaps currently underpriced or overpriced in relation to its true market value (sometimes referred to as its “intrinsic value”).
Technical analysts rely on using various technical analysis trading tools to determine favorable market entry and market exit points.
Investors who prefer to use fundamental analysis to determine whether to buy and sell a stock focus instead primarily on analyzing a company’s financial metrics.
Here’s a rundown of some of the key financial metrics that commonly accompany a stock chart:
P/E ratio
The price-to-earnings ratio shows the current share price divided by the company’s earnings per share. It essentially reflects what investors are willing to pay for each dollar of a company’s earnings. A popular alternative metric is the price-earnings-growth (PEG) ratio, calculated as the P/E ratio divided by the growth rate of earnings over a designated period of time.
Total Revenue
(For the most recent annual period; revenue for the prior year is usually also given, for comparison purposes, to see if the company’s revenues are increasing or decreasing)
Net Income
(Again, the prior year’s figure is usually also stated)
EBITDA
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization”. It’s a popular valuation metric that reflects a company’s operating profit. An alternative metric is EBIT – “Earnings Before Interest and Taxes”.
Profit margin
Profit margin states the percentage of each dollar of revenue that is profit for the company.
P/B ratio
A metric frequently favored by value investors, the price-to-book ratio reflects a company’s share price relative to its per share book value. A company’s book value is equal to its assets minus its liabilities. While the P/E ratio shows how much investors are willing to pay for each dollar of a company’s earnings, the P/B ratio shows how much they’re willing to pay for each dollar of a company’s net assets.
Important Stock Analysis Note: A company’s financial metrics are of limited use when looked at in isolation. The numbers become much more meaningful when they are evaluated in comparison with the same metrics showing for similar companies, marketplace competitors, or companies within the same industry or market sector.
For example, a company showing a 15% profit margin doesn’t mean much beyond the fact that at least the company is profitable. It’s much more significant for a stock investor to see that a company enjoys a 15% profit margin while none of its competitors has a profit margin higher than 8%.
How to Read a Stock Chart: Conclusion
Stock charts and the financial information that typically accompanies them provide the basis for stock market investors to make reasonably informed decisions about whether to buy or sell a stock. Of course, no one method of stock analysis is infallible – that’s why different investors prefer to use different technical indicators or financial metrics to evaluate a stock.
However, knowing how to read a stock chart and interpret the information provided is definitely a skill that, once you master it, is likely to improve your bottom-line profitability as a stock market investor significantly.
