Learning how to read stock charts is an essential skill for any new investor. Stock charts allow you to visualize stock price movements over time and can help you spot trends, patterns, and key support/resistance levels. While it may seem intimidating at first, reading stock charts is not difficult if you understand a few basic principles.
Table of contents
- What is a Stock Chart?
- Common Types of Stock Charts
- How to Read Candlestick Charts
- Common Chart Intervals
- Key Elements of a Stock Chart
- How to Analyze Stock Charts
- Stock Chart Patterns for Beginners
- Chart Reading Tips for Beginners
What is a Stock Chart?
A stock chart graphically depicts the price movement of a stock over a set period of time. It plots the closing price of the stock on the vertical y-axis and the time interval on the horizontal x-axis. Most stock charts use candlesticks to indicate price action during each period.
The candlestick will rise if the closing price is higher than the opening price for that time interval and fall if the closing price is lower. The color of the candlestick also indicates if the price closed higher (white/green) or lower (black/red) from the previous close. This visual representation makes understanding price trends intuitive.
Common Types of Stock Charts
There are a few main types of stock charts that beginners should familiarize themselves with:
A simple line chart connects the closing stock prices over time with a line. This depicts the overall price trend but does not show intraday price action.
Bar charts use vertical lines to indicate the price range for a specific trading period. The top and bottom of the vertical line mark the highest and lowest prices.
As mentioned earlier, candlestick charts use candlesticks to show opening, closing, and high and low prices for each period. This is the most popular type of stock chart.
How to Read Candlestick Charts
Since candlestick charts are widely used in stock chart analysis, let’s take a closer look:
- The thick-colored or white candle body indicates the opening and closing price range.
- The thin wicks above and below the candle body display intraday high and low price points.
- A green/white candle means the closing price was higher than the opening price.
- A red/black candle means the closing price was lower than the opening price.
- A longer candle body suggests stronger buying or selling pressure during that trading period.
Common Chart Intervals
Stock charts display different time intervals of historical price data:
- 1 min, 5 mins, 15 mins – Used for very short-term, intraday analysis
- 60 mins, Daily – Used for short-term swing trade analysis
- Weekly, Monthly – Used for a long-term position or investment analysis
Beginner traders should start with daily charts to get a feel of short-term price action.
Key Elements of a Stock Chart
In addition to displaying price data, stock charts also visually communicate key elements that are useful for analysis:
Volume indicates the total number of shares traded during each period. High volume suggests strong investor interest and potentially more significant price moves.
Moving Averages (MA)
Moving averages smooth out price data by taking the average closing price over set periods of time. Comparing the current price to key MAs indicates strength or weakness. Common MAs are 50, 100, and 200 periods.
Support and Resistance
Support is a price level that historically prevented the stock from falling further. Resistance is a price level that has historically capped upside moves. These act as potential floors and ceilings for price action.
How to Analyze Stock Charts
When looking at any stock chart, pay attention to:
- Candlestick patterns – Do you see long green candles suggesting strong upside momentum or long red candles indicating downward momentum?
- Price trends – Connect swing highs and lows to see if the stock is trending up, down, or sideways. Use moving averages to identify the direction and strength of trends.
- Support and resistance levels – Notice if the price approaches key support/resistance levels and anticipate potential bounces or breakdowns.
- Volume – Spikes in volume when the price breaks support/resistance indicate increased conviction behind the price move.
Stock Chart Patterns for Beginners
Some key chart patterns worth recognizing as a beginner include:
- Cup and Handle – Bullish continuation pattern indicating consolidation before further upside.
- Head and Shoulders – Bearish reversal pattern that signals distribution before potential downside.
- Double Tops/Bottoms – Short-term reversal patterns predicting a change from upside to downside trend.
There are many more patterns worth learning as you progress in your chart reading skills.
Chart Reading Tips for Beginners
Here are some best practices when getting started with stock chart analysis:
- Start with daily chart intervals, then move to shorter timeframes as you improve.
- Use simple moving averages first (e.g., 50 SMA, 100 SMA) before advancing to more complex indicators.
- Combine chart reading with technical and fundamental analysis to make more informed trading decisions.
- Review charts of different stocks in the same industry to quickly compare price action.
- Chart reading improves with experience. Keep practicing!
Learning how to accurately read stock charts takes time and practice. However, understanding how to analyze price trends, support/resistance, volume, and patterns provides a solid foundation for stock market beginners. Master this crucial skill, and you’ll be able to spot high-probability trading opportunities sooner.
What are the best charts for beginners to start with?
The best charts for stock market beginners are candlestick charts using daily intervals. Candlestick charts clearly show opening, closing, high, and low prices. Daily intervals provide short-term price action that can help new traders spot trends and patterns.
What is the most important thing I should look for in a stock chart?
As a beginner, focus first on spotting uptrends and downtrends, connecting swing highs and lows on a stock chart that shows the prevailing price trend. Uptrends indicate bullish momentum, while downtrends signal bearish sentiment.
How do I spot support and resistance levels on charts?
Support levels can be identified when the price stops falling and bounces back up from the same price area multiple times. Resistance occurs when a price repeatedly gets rejected from advancing past the same price level. These act as potential floor and ceiling levels for the stock price.
What are the advantages of using indicators like moving averages?
Moving averages smooth out daily price fluctuations and help clearly visualize the prevailing trend. Crossovers between fast EMAs like 50-day and slower EMAs like 100 or 200 indicate shifts in momentum that traders can take advantage of.
How many charts should I have open when analyzing a stock?
It’s generally good practice to have the daily chart open, along with shorter time frame charts like 60-minute or 15-minute charts to look for entry and exit points. Multiple open time frames let traders analyze both long-term trends and short-term price action.