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How To Read Stock Charts For Beginners

In this page, you will learn how to decipher the message that can be found in stock charts. You will learn the basics of reading stock charts.

You will also 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.

What Are Stock Charts

Stock charts are actually prices that the stock experience each day. Every day, the range of prices that the stock goes through is recorded and printed on the chart.

In the old days before the convenience of technology, people had to look at stock prices at brokerage firms. These quotes will be updated on a board for all to see.

Today, the prices of stocks are updated immediately and they are instantly translated into charts.

When you have enough data for a certain period, the stock chart will look like charts that you have seen when you are in a science class. They go up or down rising and falling.

From these data we can determine quite a number of things:

  • Is the stock going up or down?
  • Is the stock in an uptrend or downtrend?
  • Are there significant patterns that is developing?

Charts have been used for a long time not only for investing or trading. In fact scientist use charts to tell us whether something is increasing or decreasing. For example, the population chart that is moving up from left to right will tell us that the population of a certain species is increasing.

Scientist have also used charts to tell us whether pollution is increasing or decreasing.

So do not dismiss charts as being useless. They can often tell us many clues about a stock's behavior if only you learn how to read them.

How To Interpret The Data In A Stock Chart

Take a look at the chart below. For newbies they seem like something alien. Its just like us going to a seismologist's office and see the charts that they have in their office.

It does not make sense to us.

But if we learn a bit about how to interpret the data, it will open up our eyes to a whole new world of information.

The above is a snapshot of a Japanese Candlestick chart of SPY that I have taken from Freestockcharts.com

  • You will usually have the ticker and name of the financial instrument. Tickers are short forms of the long name. It allows traders to easily find the instrument without needing to type in the whole name.
  • You will also have the time and date. Most stock charts will give you real time quotes though some may have a 15 min delay.
  • Then you have the timeframe. If the timeframe is "Day" then each bar represents one trading day. If the time frame is "5 minute", then each bar represents 5 minutes of trading.
  • Near the top right you will have the percentage gains or losses and the amount that has risen or fallen for that day. If it is green then it means the stock went up by so much. If it is red, it means the stock went down by so much.
  • On the right hand side, you will have the prices axis that shows you where your stock is at a particular day.
  • In the middle of the entire chart are Japanese Candlestick bars. Each bar represents the trading action of an entire day. It records the highs of the day, the lows of the day, the opening price and the closing price.
  • You will also notice 3 moving averages that I have placed on the chart. They are indicators. The red colored line is the 20 day moving average, the blue colored line is the 50 day moving average and the yellow colored line is the 200 day moving average.
  • At the bottom of the chart is the volume that is traded for each day. The white line on the volume is the 50 day moving average of the volume.

Take a look at another chart above. This time, it is a chart I have taken from Trading View.

Each stock chart platform will be a bit different. But wait...don't worry and don't be confused. They actually tell you pretty much the same story.

Slowly look at the different information above and you will notice that they tell you almost the same thing as the previous stock chart from Freestockcharts.com

Why Are Some Stock Charts Black Or White Or Blue?

If you go to different websites, you will see different colors of stock charts.

Some may have a white background, some may have a black background and some might even allow you to have blue colored background and some allow you to have multiple colors.

Well, today chart providers allow their users to customize the color of the stock chart to their liking. I prefer to have a white colored background. Because I can easily annotate them later.

I also have a blue colored background because I find the color more soothing than the white which can be quite bright.

Which Stock Charts Should I Use?

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.

Other places which you can find free stock charts are:

  • Stockcharts.com
  • Tradingview.com
  • Investing.com
  • Barchart.com

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.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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