The question of How To Read A Stock Chart could certainly be compared to the saying about the game of poker: –
Poker, it takes five minutes to learn and a lifetime to master.
Once you have the basics down, you’ll see that the interpretations of what a stock chart is telling you, can vary widely.
In their standard format, stock charts tend to either be candlestick or bar charts that plot the open/high/low/close for a specific period (often one candlestick/bar per day).
A candlestick: –
A typical stock chart configuration: –
There are many ways to read a stock chart with various different layers in the form of technical indicators that you can apply to your chart, but there are some core elements that a trader should consistent endeavor to appraise in order to make sense of a stock chart.
- Is the stock range-bound or trending?
- Is it volatile or calm?
- Where is the highest volume transacting relative to the recent action?
- How effective is the market what it’s currently trying to do?
- How long has it been in its current phase/market condition?
- What in terms of price structure (e.g. support/resistance levels, trendlines etc.) delineates the current phase/market condition from a change?
Many of these points can be addressed simply by looking at the relative size, location and level of overlap of the candlesticks. Lots of overlap might indicate a range-bound market for example. Many larger than usual candlesticks (this can even be assessed by a visual inspection) both moving higher and lower, might indicate that the stock has seen elevated levels of volatility of late.
Inferences for future action
What trips up most people and this goes back to the saying about mastering poker, is figuring out what the market is likely to do next because of what it has done in the recent past.
Technical and fundamental context are like the market story and a story is far more predictable if you’ve been following it from the start – dipping in and out of it could lead to questionable reasoning and conclusions and lead a trader to making costly trading decisions.
You might for example, recognize that a stock is primed for a break higher because it’s been building a good base and has just had some very positive news. But then if instead you subsequently see a small break higher followed by a strong reversal back into prior traded areas, you should be on red alert and looking for signs that buyers are getting trapped in case the market is in fact much weaker than you had initially concluded.
The change in price of a stock must be viewed with an understanding of why traders might being acting in a certain way and where the danger lies. Seeing what a stock has done versus anticipating what it’s about to do, aren’t always as closely related as some might think.
How To Read A Stock Chart
There’s reading a stock chart and there’s reading a stock chart. Knowing the key basics is just a fraction of what you need to understand in order to become a competent reader of stock charts and stand a fighting chance of figuring out what the market is likely to do next – clearly a useful factor in identifying where the greatest opportunity (and risk) lies.