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Stock charts help investors understand how stock prices change over time. They are essential tools for anyone investing in the stock market.
Reading stock charts shows current and historical prices, giving you insight into what’s happening in the wider market. Understanding how stock charts work is an important step in becoming a better investor.
What is a stock chart
A stock chart is a graph that displays the price of a stock (or any type of investment asset) over a period of time. It usually shows the current price, historical highs and lows, and trading volume.
The Y-axis of a stock chart tracks price and the X-axis tracks time period (minutes, hours, months, years). By analyzing how a stock’s price has changed over time, investors can identify trends and patterns that can aid their strategy.
A bar chart at the bottom of the stock chart tracks trading volume, which measures the number of shares bought or sold over a period of time. Volume represents how much demand there is for a particular inventory.
Investors often monitor large spikes in trading volume as they tend to coincide with insider or institutional buying, important news, or changes in stock trends and patterns.
Fundamental and technical analysis
Stock charts typically contain data about a company’s underlying business metrics, known as the company’s “fundamentals.” Investors perform fundamental analysis of stocks using metrics such as earnings, earnings per share (EPS), and free cash flow.
Fundamental analysis involves analyzing a stock by comparing the fundamentals of the business to the stock price and identifying its value. One common fundamental analysis indicator is the price/earnings ratio. It is calculated by dividing a stock’s price by its EPS. The lower his P/E ratio of a stock, the more attractive it may be to investors.
Technical analysis is an alternative to fundamental analysis, which focuses solely on the past price movements of stocks. Technical analysis involves recognizing patterns and trends in stock charts and using them to predict future price movements.
Technical traders often identify support and resistance levels on a stock chart, price points where stocks are likely to change direction. Many technical traders also use other price and volume-based indicators, such as moving averages, Bollinger bands, and oscillators, to identify potential buy and sell points.
stock chart style
There are different stock chart styles. Line charts, candlestick charts, and bar charts are among the most common styles, each offering investors a different way of looking at similar information, such as opening and closing prices and intraday highs and lows. increase.
In a candlestick chart, the opening and closing prices of the period are represented by the body of each candle. Highs and lows within a period are represented by a candle’s “wick” or “shadow”, vertical lines extending from the top and bottom of the candle body.
In a bar chart, the trading range within the period is represented by a vertical line, and the opening and closing prices are represented by horizontal notches extending left and right from the vertical line.
stock chart pattern
Traders use stock charts to identify patterns that tend to indicate future price movements in either direction.
For example, double or triple tops or bottoms are commonly used reversal patterns. When a stock in an established trend “bounces” a few times without exceeding a certain level, it can be a signal that the stock’s trend is reversing.
Handled cups have a large U-shaped recess in the stock that is then pulled back slightly downwards to create a teacup-like shape with a small handle. A cup with handles is usually seen as a bullish signal to buy stocks.
Equity traders are also careful when stocks break out of established patterns.
When a stock is trading in a pattern such as a channel, triangle, or flag pattern, a breakout of that pattern in either direction indicates that the breakout direction will be the new long-term trend for the stock. There is a possibility.
Traders look for high volumes to confirm that a true breakout has occurred.
How Investors Use Stock Charts
Traders use stock charts and technical analysis as their primary means of deciding when to buy or sell stocks. Long-term investors use stock charts to get a general sense of stock price trends and relative performance.
Joel Elconin, co-host of Benzinga’s PreMarket Prep and co-founder of market research firm PreMarketprep.com, says new traders should keep things simple because technical analysis can easily be overwhelming. .
“Many investors overcomplicate technical analysis and can fall into analysis paralysis,” Erkonin says.
“We keep it simple in short to medium term trading and focus on easy patterns like double and triple tops and bottoms and multiple closes at the same level.”
Additionally, Erkonin said traders need to understand that fundamental news, such as rising earnings or CEO resignations, have a greater impact on stock price movements than technical patterns and trends. Headlines are often unpredictable, so traders should not be overly committed to technical patterns.
Stock chart comparison
Individual stock charts provide investors with a wealth of insight into a stock’s past performance and potential future performance. However, comparing two different stock charts can give a deeper insight into the stock price and the market as a whole.
Ryan Johnson, Chartered Financial Analyst (CFA) and managing director of investments at Buckingham Advisors, said investors should take advantage of duplicate stock charting features on free platforms such as Stockcharts.com and Yahoo Finance. said.
“I recommend looking at stocks relative to the stock’s sector ETF or broader stock market index as a whole, rather than just looking at stock charts,” says Johnson.
“We feel it is important to judge investment performance not only on a total return basis, but relative to market alternatives.”
Can stock charts make you a better investor?
Stock charts are important tools for every investor, but the best way to use them will vary greatly depending on the individual investor’s goals, risk tolerance, trading style, and investment horizon.
Darren Colananni, Certified Financial Planner (CFP) and Wealth Management Advisor at Centurion Wealth Management, says investors need to look at stock charts across multiple timeframes to better understand short-, medium-, and long-term trends. says there is. But long-term investors shouldn’t pay too much attention to stock charts, he says.
“When considering buying stocks, stock charts should not be the first place to look,” says Colananni.
Instead, stock patterns should be one of many things to consider as part of an investor’s due diligence process, he says.
“Purchasing stock should be viewed as a long-term investment. You are buying a small piece of ownership in a company, not necessarily immediately reselling it for profit,” says Colanni.