Investing for beginners: How to read stock charts

A stock chart is a visual representation of historical price and volume data for a particular stock or security. These charts are used by traders and investors to analyze the performance of a stock and make informed investment decisions.

Understanding how to read a stock chart is a crucial skill for any investor or trader, as it can help you make more informed decisions about when to buy, hold, or sell a particular stock.

Keep in mind this is all intended to be informational and any action taken after reading this article is entirely up to you, the reader.

Now let's dive into reading stock charts for beginners.

Understand the different types of stock charts

Understanding the different types of stock charts is important for decision-making in the stock market because it provides investors with valuable information about the performance of a stock over a period of time. Each type of chart displays different types of information, such as price movements, trends, and patterns, that can be used to identify potential buying or selling opportunities.

For example, a line chart can be used to identify the overall trend of a stock, whether it is moving up or down over time. A bar chart provides more detailed information by showing the opening, high, low, and closing prices of a stock, which can be used to identify support and resistance levels. A candlestick chart provides even more information by showing the relationship between the opening and closing prices, as well as any gaps or patterns that may indicate a potential price reversal.

By understanding these different types of stock charts, investors can make more informed decisions about when to buy or sell a stock. They can also use this information to develop a trading strategy that takes into account their risk tolerance, investment goals, and market conditions. In short, understanding stock charts is essential for making informed decisions in the stock market and maximizing potential returns.

Line Chart: This is the simplest type of stock chart. It shows the closing prices of a stock over a period of time. It is a good way to get a quick overview of how a stock has performed over a certain period.

Standard Line Chart

Bar Chart: A bar chart is similar to a line chart, but it provides more information. It shows the opening, high, low, and closing prices of a stock over a certain period. The length of the bars represents the price range for the stock during that period.

Standard Bar Chart

Candlestick Chart: A candlestick chart is similar to a bar chart, but it provides even more information. It shows the opening, high, low, and closing prices of a stock over a certain period, but it also shows the relationship between the opening and closing prices.

Standard Candlestick Chart

Point and Figure: Chart A point and figure chart is different from other charts because it does not use a time axis. Instead, it only shows changes in the price of a stock. Each point on the chart represents a certain price level, and movements between the levels are shown with X's and O's.

Standard Point and Figure Chart

Renko Chart: A Renko chart is another type of chart that does not use time as a reference. Instead, it shows changes in price based on a set value. It is created by drawing blocks or bricks in a certain direction, depending on the direction of the price movement.

Standard Renko Chart

Basic Google Stock Chart: Last we have your basic view from places like Google, Yahoo Finance, and Robinhood. These charts are very user-friendly with different time periods and chart types just a click away. They take many of the best features from the charts above and summarize them all in one view.

Standard Stock Chart

Identify the different types of data within stock charts

Stock charts include different types of data points such as the stock price, trading volume, and moving averages. The stock price is represented by the vertical axis of the chart and is typically shown in dollars and cents. In the chart below you see the price range is from 145 up to 235.

Trading volume is typically along the horizontal axis as well just in a subsection right below the stock price. As you can see below the trading volume ranges from 0 to 80 million shares per day.

Moving averages are lines on the chart that show the average price of a stock or the average trading volume over a set period of time. There is an arrow in the figure below pointing out the 20-day average volume.

Stock Chart Including Volume

Identify key trends and patterns

Understanding the trends and patterns in a stock chart can help you make more informed investment decisions. Look for patterns like head and shoulders, double bottoms, and trends like uptrends, downtrends, or sideways trading.

Head and shoulders:

The head and shoulders pattern is a technical chart pattern that can appear on a stock chart. It is formed when a stock's price rises to a peak (the left shoulder), falls back, then rises to a higher peak (the head), falls again, and then rises to a third peak (the right shoulder) which is approximately the same height as the left shoulder. The pattern resembles a head with two shoulders on either side, hence the name.

The head and shoulders pattern is often used by technical analysts as a signal that a stock's price trend may be about to reverse. When the price falls below the support level, which is the line connecting the two troughs between the shoulders and the head, it is viewed as a confirmation that the pattern is complete and the price may continue to fall. This is known as the neckline.

If an investor notices a head and shoulders pattern forming on a stock chart, it can be a potential signal to sell or avoid buying the stock. This is because the pattern suggests that the stock is losing its momentum and may experience a downward trend in the near future.

** - Even though these trends may appear there is no guarantee which direction a stock is headed. These are technical indicators that professionals utilize. This is all intended to be informational and any action taken after reading this article is entirely up to you, the reader.

Head up Stock is Going Down

Head down Stock is Going Up

Double Bottoms:

A double bottom is a chart pattern that can appear on a stock chart. It is formed when a stock's price falls to a certain level, then bounces back up, falls back down to the same level, and then bounces back up again. This creates two low points that are approximately equal in price, forming a "W" shape on the chart, pretty genius naming strategy right?!?

This pattern is often used by technical analysts as a signal that a stock's price may be about to reverse. When the price rises above the resistance level, which is the line connecting the two peaks between the two bottoms, it is viewed as a confirmation that the pattern is complete and the price may continue to go up.

If an investor notices a double bottom pattern forming on a stock chart, it can be a potential signal to buy the stock. This is because the pattern suggests that the stock has reached a support level and may experience an upward trend soon. None of this pattern recognition has anything to do with the performance of a company. Many of these chart patterns and stock behavior are a result of the natural tendencies of traders, both professional and novice.

Double Bottom Stock Chart

Sideways Trading:

Sideways trading, also known as consolidation, refers to a period on a stock chart where the price of a stock trades within a relatively tight range with little upward or downward movement. We aren't talking about a day, or week, we are talking about a trend that displays itself over a 30+ day period. During this period, the stock's price moves up and down within a specific range, without breaking out to new highs or new lows.

When a stock enters a period of sideways trading, it can be a signal that the market is indecisive about the stock's direction. This could be due to a lack of significant news or events that could move the stock's price, or a period of uncertainty about the company's future prospects.

If an investor notices a period of sideways trading in a stock they are interested in, it can be a signal to wait for more information before making a buying decision. It may also indicate that it's a good time to consider selling the stock, as it is not likely to see significant upward movement in the near future.

Use Technical Indicators

Technical indicators are mathematical calculations that are based on the price and/or volume of a stock. They are used to help predict future price movements. Some of the most common indicators include moving averages, Bollinger Bands, Relative Strength Index (RSI), and Stochastic Oscillators.

Bollinger Bands Example:

Stock Chart with Bollinger Bands

Relative Strength Index (RSI) example

Stock Chart with Relative Strength Index (RSI)

Stock Chart with Stochastic Oscillator

By understanding how to read a stock chart, you can gain a deeper understanding of a stock's historical performance, and use that information to make more informed investment decisions. However, it's important to keep in mind that stock charts are only one of many tools used to evaluate a stock and it's important to consider a variety of factors when making investment decisions.