This article of our Stock Trading Course for Beginners will focus on how to read stock charts like a pro. You will learn about each of the following:
- Line Charts
- Candlestick Charts
- Bar Charts
- Support and Resistance
You received a brief introduction to line charts in the previous article. A line chart is a basic graph of the closing prices of a stock over a period of time. Line charts are good at showing whether or not a stock is going up or down overall, but they do not contain enough information to make good trading decisions on a day to day basis.
The candlestick chart is the chart of choice for almost every trader. They are incredibly customizable and can display lots of easy to understand information at one time.
The candlestick has three parts: The body, the upper tail, and lower tail (also called “wicks”).
The bottom of the body for a green candlestick is the price the stock opened, and the top of the body is the price the stock closed. On the other hand the top of the body for a red candlestick is the price the stock opened, and the bottom of the body is the price the stock closed. For both colors, the upper tail represents the highest price the stock reached before falling back. The lower tail represents the lowest price the stock reached before rising up.
Each candle represents an amount of time, and each chart represents a time period. Charts can be minute to day, day to month, month to year, or anything in between.
Bar charts are similar to candlestick charts, but do not have the body. They are a compromise between the visual trend of the line chart and the information of the candlestick chart. Green bars represent an increase with the low tick showing the opening price, and the high tick showing the closing price. Red bars represents a decrease with the high tick showing the opening price and the low tick showing the closing price.
Support and Resistance
Support and resistance is one of the most important parts of technical analysis and probably the best indicator. Both based on price levels. “Support” is the price the stock will generally not go below. “Resistance” is the price the stock will generally not go above. You determine support and resistance by checking for these prices. Here is a chart:
Here are the support and resistance levels:
When a stock breaks through a resistance level, this can be a sign to buy. Some traders prefer to wait until the previous resistance level becomes the new support level.
When a stock breaks through a support level, this can be a sign to sell. Most traders take it as a signal that the stock price will continue falling.
Indicators are various averages and statistics placed on a chart to show trends. Let’s look at the following 3 different indicators:
- Exponential Moving Average (EMA)
- An EMA is an average of price actions over a period of time weighted towards the most recent data.
- Relative Strength Index (RSI)
- The RSI is a momentum indicator. It compares gains and losses over a period of time to measure speed and change of price. It used to determine if a stock is overbought or oversold.
- The Ichimoku Cloud is used to show support and resistance, momentum, and trend directions. It displays multiple moving averages.
A stock’s volume is a measure of how many shares have been traded. Volume shows how liquid a stock is. A high volume means you will be able to easily get shares, while a low volume means it will take time. Another thing to keep in mind is that if a stock has low volume and you purchase a large number of shares, you will directly influence the stock price and everyone else that has shares will most likely sell, but you will be unable to sell off your own shares.