How To Read Stock Charts For Beginners

In this page, you will learn a few simple tricks to determine the health of a stock or market. Stock charts are tools that help you gauge what is happening in the stock. It will be foolish to ignore them.

For the purpose of analyzing stocks, I use Freestockcharts. They are free to use for basic version, hence the name, but I use a paid version for extra stuff like scanning. The chart you see above is a candlestick chart.

Green bars mean the stock open lower and closed higher. While red bars simply mean the stock open higher but closed lower. The wicks on the top and bottom shows the high and low of the day.

When A Stock Is Above Its 200 MA

Moving averages are very useful to help us determine the health of a stock or market. The yellow line in the chart above is the 200 day moving average. The 200 MA is a very important moving average an it is observed by thousands of traders and investors worldwide.

  • When a stock is above its 200 MA, the stock is deemed to be healthy long term
  • A rising 200 MA shows us that the stock is in a long term uptrend

You should only buy stocks that are above its 200 MA. It is dangerous to invest or buy a stock that is below its 200 MA as the stock is unhealthy. No matter what your adviser or broker tells you, never ever buy a stock that is below its 200 MA.

When A Stock Is Above Its 50 MA

The 50 day moving average is another very important moving average that is observed by investors and traders. I use this moving average quite a lot to form trading strategies and sometimes I would buy a stock when it touches its 50 MA because they often act as very good psychological support.

  • When a stock is above its 50 MA, the stock is deemed to be mid term healthy
  • A rising 50 MA shows that the stock is in a mid term uptrend

Many times, a stock will bounce off the 50 MA and also the 200 MA. That is why many traders tend to buy stocks when it reaches these 2 important moving averages.

The 20 MA

I like to use the 20 day moving average to help me determine the short term health of a stock.

  • A stock that is above its rising 20 MA is in a short term uptrend

Combining The 3 Moving Averages

When you combine the 3 moving averages, you get a pretty clear picture of what the stock is doing. If a stock is above all 3 rising moving averages, it tells us that the stock is really in a solid bull trend.

If you look at the chart of the SPY above, you can see that the S&P 500 is in a very bullish uptrend. This is very good for momentum traders. Some traders only trade stocks that are above all 3 moving averages as it gives them the best chance of riding a big winner.

The Lesson

If you want to find stocks that will give you a healthy bull run, you should look for a stock that is above its rising 20 MA, 50 MA and 200 MA. Simple as that.

Stay away from stocks that are zig zagging through these 3 moving averages.

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