How to Read a Stock Chart…Like a Boss!
Table of Contents
Are you a new trader? Is a stock chart confusing to you? In this article, I am going to cover the basics of how to read a stock chart. This is geared toward someone who has never looked at a chart in their life or has seen a stock chart but has no clue what they are looking at.
1. Where to Find Stock Charts
The first step to learning how to read a stock chart is to have a chart to look at. There are many websites that provide free charts but two websites I recommend for their simplicity are yahoo finance and barchart.com. If you want something more advanced, check out tradingview.com.
2. How to Read a Candlestick Chart
Let’s use the following images to go over the basics.
What is a Candlestick Chart?
A candlestick chart is composed of vertical green and red lines called candlesticks. Each candlestick provides price information for a specified period of time (1 minute, 10 minutes, 1 day, …etc). On most charts, each candlestick will either be colored GREEN or RED. If the candlestick is GREEN it means that the trade price at the end of the time period is higher than the trade price at the beginning of the time period. If the candlestick is RED it means that the trade price at the end of the time period is lower than the trade price at the beginning of the time period.
Additionally, each candlestick can have an upper wick and/or a lower wick. The top of the upper wick is the highest price the stock traded at during the time period. The bottom of the lower wick is the lowest price the stock traded at during the time period (see slide #3 and #4).
3. Useful Stock Chart Terms
Apart from the candlesticks, you can find other useful information on a stock chart. Volume is defined as the number of shares traded during the time period (each candlestick). Most charts display the volume at the bottom of the chart (see slide #1 and #2). Volume is important to understand what the majority of traders are doing during a time period.
If the volume is high and the candle is GREEN, it tends to indicate more traders were buying the stock. If the volume is high and the candle is RED, it tends to indicates more traders were interested in selling the stock.
If you understand supply/demand in economics, think of the volume as the demand and the range of the candlestick as the supply. Supply is low when the range of the candlestick (the difference between the open and the close) is large. The important thing to remember is that the volume of the stock can help you understand stock price behavior. Read more about How to Use Volume to Improve Your Trading here.
The float of a stock is defined as the number of shares that are available to be traded. When a stock has its Initial Public Offering (IPO) shares are sold to investors (Common Stock) but some shares are not available to be traded right away (Preferred Stocks). Read about the two types of stocks here.
The important thing to know as a day trader is that the float size can affect the speed of price movements. Low float stocks have fewer shares available to buy and sell. When more traders are interested in buying or selling a low float stock, the price can rise and fall very quickly. Conversely, a stock with a high float would need to have a higher volume for the price to change significantly.
Although there is no definition of what exactly constitutes low float vs high float, low float is less than 20 million shares, micro float is less than 5 million shares and high float is over 100 million shares. Here is more information about float and its significance.
Support and Resistance
Support is a term that is used to describe a historical price level where more traders are will to buy shares. Resistance is a term that is used to describe a historical price level where more traders are willing to sell shares. Support and resistance can be horizontal ($20) or they can be on a trend (up trend or down trend). Each trader will need to learn to draw their own support and resistance lines.
Support and resistance levels are very important when trading stocks because they can help you determine good entry and exit points to increase the Risk to Reward ratio on a trade. Here is more information about Support and Resistance Levels.