When you enter the world of trading and investing, you will need to be familiar with graphs, because the prices for most financial instruments are visualized in the form of graphs or charts. those who invest or trade need to be able to read them. Do you know how to read stock charts? If you don’t then we have the perfect guide for you.
In this post, we will go over the many different ways that you can read a stock graph.
What Is a Stock Chart?
A stock chart is a presentation of data on stock price movements, displayed in the form of a graph. Investors and traders use stock charts to analyze stock prices, using price movements in what is called technical analysis.
When conducting technical analysis, you will monitor how the price moves, where the highest and lowest points are, and you will be able to understand how the stock has been trading, and whether it is going up or down.
Basic Stock Chart Features
On a stock chart, you will find 4 main features that every platform usually provides without setting it up first. Those four things are time scale, price scale, historical price, and volume indicator.
Time Scale ( X-Axis)
The time scale is the scale that is located horizontally at the bottom of the graph. This time scale will show the time that has passed, usually presented in minutes, hours, days, months to years.
For example, the time scale displays the past and coming months, and the one circled in black indicates the beginning of August 2022.
Price Scale ( Y-Axis)
The price scale is a scale that is located vertically on the chart. Usually, the price scale will be seen at the lowest price, namely 0$, up to the stock's current price.
This historical price is the entire price trail that has been formed before. A chart will usually still represent a price in the past for use as a reference by traders.
Historical prices are on the left and continue to the right at current prices.
Different from other indicators, which generally have to be set first if we want them to appear on the chart. Most of the volume indicators are always shown by most platforms. This indicator shows the buyer's or seller's strength of shares traded at a given time.
Stock Chart Types
For beginners, the first thing you should learn from reading stock charts is the types of stock charts. There are at least 4 types of charts that you should know, where every kind of chart has its advantages and disadvantages.
The line chart is the most common type, and it is used by investors. This type of stock chart is easy to understand because the information is presented clearly.
The line chart is where this line goes up and down at a certain period in projecting price movements. The projected price movement is usually only at the closing point in that period.
Because this chart only displays closing prices, you will not get more detailed information such as opening prices, lows, and highs. Therefore, professional traders rarely use this chart, apart from using it to draw trendlines.
Bar charts are one of the most popular types of stock charts among traders. Why do they like it? Because according to them, a bar chart is a chart that provides more information than a line chart.
Bar charts are a bit more complicated than line charts, but you can get a lot more information such as the opening, closing, lowest and highest prices for a certain period of time.
Because the bar chart provides this information, this type of chart is also known as an OHLC chart (Open - High - Low - Close).
- Open represents the starting point of the price movement in a certain time period
- High represents the highest price point in a certain time period
- Low represents the lowest price point in a certain time period
- Close represents the point where the price stops moving and closes
Reading a bar chart it's not difficult, as long as you understand the basics above.
The bar chart is depicted in two colors, green and red.
Bar charts with a green color indicate that the stock's closing price in a certain period is higher than the stock's opening price. This means that prices are experiencing an increase over a certain period.
On the other hand, a red bar chart indicates that the stock's closing price in a certain period is lower than the opening price. It means that the stock price is experiencing a decline for a certain period of time.
The point is that you have to pay attention to the distance between the open and close on the bar chart.
When the closing price is far above the opening price, buyers are active and dominate the market for a certain period. We can speculate that the possibility of the next bar buyers will still dominate the price movement.
Vice versa if the closing price is far below the opening price. It means that the seller is very active and dominates the market for a certain period of time, and maybe the seller will still be very active on the next bar.
Candlestick charts are the type of chart most traders use worldwide since a rice commodity trader first discovered it in the 18th century named Honma Munehisa.
The adoption of candlesticks graphs continues to be used for price movements analysis, be it stocks, currencies, or cryptocurrencies to commodities such as gold and silver.
As the name suggests, this chart does resemble the shape of a long candle stick.
This chart type has advantages over the two previously mentioned chart types. The advantage is that you will receive complete information through this candlestick.
The information you can get includes the lowest price, highest price, opening price, and closing price for a certain period of time.
On candlesticks, you will usually find the four most common colors, namely green or black to indicate stock prices are rising (bullish) and red or white to indicate stock prices are declining (bearish).
To read a candlestick graph, first, you need to understand the following three parts:
This section will find the opening and closing prices for a certain period. In addition, by paying attention to the body candle, you can find out how far the stock price moves and how strong the buying or selling is.
Usually, the longer the body of the candle, the stronger the momentum, whether it's the buyer if the candle is green or the seller when the candle is red.
This section will show the highest price in a specific period. In addition to the body candle, you also know the strength of the buyers or sellers by looking at the upper shadow. If the upper shadow is long, leaving a small green candle body, we can conclude that there is still a lot of sellers.
If that is the case, then there is a possibility that the next candle will be red, and sellers will gain momentum.
The lower shadow is the opposite of the upper shadow. Paying attention to the lower shadow will give you information on the stock's lowest price.
The advantage is that traders can take advantage of the candle shape pattern as a trading signal because it has been proven accurate. The downside is that there are so many candlestick patterns, and it will be difficult for you to memorize them.
But you just need to memorize a pattern that you think is very accurate and use it as a signal. You can also use our trading patterns cheat sheet, to check all of the patterns in one single place.
It doesn't take much, one to three patterns is more than enough, then you just need to wait for the pattern to appear in the market and start trading.
The Heiken-Ashi chart is a development rather than just a candlestick chart. This type of chart has just become popular among traders and has been proven to be quite accurate in the market.
Because this is a development of the candlestick chart, it also has open, close, high, and low. Still, the calculation element is not as simple as candlesticks and it is much more complex.
The advantage of this chart type is that a simple display is presented in the chart so that the picture of the price trend is very clear. Of course, this is very profitable if used in a market with high volatility. If you use candlesticks in general, the shape is unpredictable or random.
In addition, another advantage is that there are already many indicators that traders have created specifically to support the use of this type of chart. So if you are a trader who likes to use indicators for trading decisions, the Heiken-Ashi chart should be your main option.
However, it also has a drawback - the signal given will be slower for traders to receive than when using ordinary candlesticks. But this weakness is an advantage because you can minimize fake signals that often appear in the market with a weak signal.
Tips for Reading Stock Charts
Reading stock charts is not arbitrary, since there are several things you need to pay attention to. This is very important, considering that the results of your trading decisions depend on the analysis of reading stock price movements.
When reading charts and predicting price movements, there are at least 5 things you should pay attention to, namely:
1. Determine the Price Trend
Determining the trend is the first step of stock trading because when entering the market, it is very unlikely that we want to trade to take profits quickly on a trend that is not appropriate.
For example, you want to buy shares of company ABC while at that time the company's shares are experiencing a downward trend (bearish). Then, of course, it will be very risky and not worth the potential profit you can get.
It's different when entering a trade when the trend is going up (bullish), then your chances of making a profit are already above 50%. It is important to understand how trends can be profitable. So determining this price trend is very important; to determine it is quite easy.
- Bullish Trend: When the price makes a peak and re-forms a higher peak than before for some time, then it can be considered a bullish trend
- Bearish Trend: When the price makes a lower, re-forms a lower low, and keeps repeating for a while, the trend can be bearish
2. Find Support and Resistance
The second step is to determine the support and resistance. People ask, how can we know that the price will bounce or continue to increase or decline at a certain point?
The answer is very simple - determining support and resistance. What are support and resistance?
Support is the lowest point where the price can go down and then experience an upward reversal if the price returns to that point. Meanwhile, resistance is the highest point in the price, and if the price increases and moves back towards resistance, there will be a potential for a reversal.
Why would such a thing happen? According to the theory, when the price approaches the two areas, the psychology of market participants is almost the same. For example, when the price reaches a resistance point, most market participants will assume that the stock price is quite high, and then they sell their stock holdings.
And so, when the price approaches the support area, traders will usually think the stock price is already cheap and make a purchase so that the price jumps up.
3. Try to Use Candlestick Patterns
This type of candlestick chart has an advantage that many traders have benefited from. The advantage is the price pattern which is visualized in the form of a candle.
You need to know that the price has a pattern that keeps repeating itself like a circle. Unfortunately, this price pattern cannot be visualized using other charts.
The price pattern can take various forms, but in general, there are 2 candlestick patterns: continuation and reversal.
There are various types of candlestick reversal patterns, that indicate a reversal, such as a hammer, shooting star, hanging man, and so on. In the same way, there are continuation patterns, such as marubozu and long candles.
Try to study all the candlesticks and find them in the market so that you can read the charts better, and identify whether the trend will continue or reverse.
4. Find out the Chart Pattern
Is the candlestick pattern the same as the chart pattern? The answer is no. A chart pattern is a pattern rather than a price formation that has already occurred. So it can be said that chart patterns are a combination of candlestick arrangements that form a pattern that can be used to read charts.
In contrast to candlesticks, chart patterns have three types that are often encountered: continuation patterns, reversal chart patterns, and bilateral chart patterns. Knowing these three things allows you to read the chart and predict the price direction easily.
5. Using Indicators
When you try to read a stock chart and predict the direction of the price in the future, you don't have to rely just on candlestick charts alone. Within the charts, there are tools that mathematicians have created using the formulas they discovered to help predict prices.
Examples of the most common indicators used in reading charts include moving averages, RSI, MACD, stochastic, etc.
The Best Platform To Read Stock Graphs
Stock charts are already available on various platforms on the internet, but some are better than others. Not only in terms of appearance, but also in the features they offer.
When a trader invests in stocks for the first time and wants to analyze stock charts, the best platform is by far TradingView. Why is that?
Tradingview is a platform that offers real-time price charts on various financial instruments such as crypto, stocks, forex, and commodities. It has the advantage of having a very modern and user-friendly appearance, as well as complete features along with hundreds of indicators that we can use.
If you are a novice trader, then this is the most suitable place to start your journey.
Investing is a platform that also provides stock charts, forex, crypto, and more. However, unlike TradingView, which prioritizes technical features, Investing is where someone looks for news about stock.
If you are a trader who is trading based on the news, then maybe this platform is suitable for you to use.
3, Yahoo Finance
Yahoo Finance is also a platform that provides free stock charts. They provide features that are sufficient for beginner-level traders. Yahoo also has something in common with Investing - they provide the latest news for you to enjoy.
You can monitor news about the company you want to buy shares of here. However, compared to Investing and TradingView, Yahoo Finance lacks enough features for advanced traders.
There are two types of investors and traders - those with long-term investment plans and those with a much shorter-term investment horizon.
Short-term investing or trading requires technical analysis, especially the ability to read charts.
To read charts using a candlestick chart, you have to pay attention to 5 things - price trends, support and resistance, candlestick patterns, chart patterns, and indicators. Paying attention to these five things means that you already know the basics of how to read stock charts.
Now you just need to find a platform that you are comfortable with!