Stock charts are one of the most utilized tools that investors and traders use every day. From day traders to long-term investors, being able to read a stock chart is crucial for success in the stock market.
There are two forms of analysis when it comes to picking a stock, they are fundamental and technical analysis.
Fundamental Analysis is a method of determining a stock’s true fair market value. In other words, it is using analysis tools to determine if a stock price is more expensive or cheaper than it is truly worth.
Fundamental analysis is performed by reading through a company’s financial statements and through the use of simple to complex formulas. Through the use of these formulas and viewing the financials, you are given a better understanding of how a company operates, how profitable they are, and more importantly, how profitable they will be.
On the other side, we have technical analysis.
Technical Analysis is using stock charts and indicators to determine patterns and price trends of a stock to make an educated decision on where the stock will be moving over a certain period of time.
The idea behind technical analysis is that there are certain price levels that a stock will continue to move between due to historical prices and trends.
In the book, Chart Your Way To Profits: The Online Trader’s Guide to Technical Analysis, Tim Knight runs through nearly every single chart set-up that you may see when analysing a stock.
How is this possible? Because stocks trade based on emotion. There are certain situations that lead people to buying and selling. Certain set-ups trigger emotion in the masses to buy or sell, leading to a stock increasing or decreasing, respectively.
In the book, you will learn every set-up to help you become a profitable trader, but for now, let’s talk a little bit about how to read a stock chart.
Stock Chart Resources
One of my favorite websites to help analyze stock charts is conveniently, stockcharts.com.
On this site, you can research the charts of any stock trading on a major stock exchange.
For the purposes of this blog, let’s use Apple, which trades under the ticker AAPL
Take a look at the chart above, as we just discussed, this is the stock chart for Apple.
To begin, a stock chart is a historical graph showing the price movement of a stock over a period of time.
Each of the white/red/black rectangles are called candles. Each of these candles represents the stock price movement for that day.
On stockcharts.com, you can view charts with candles on a daily or weekly basis, but using other sites, you are able to analyze stocks on a much shorter or much longer period of time, such as one minute candles, or even one month candles.
As you can see, the X-Axis represents the date, and the Y-Axis represents the price of the stock.
Now that we have the basics down, let’s move to some of the more complicated items.
Each of the following sections will be in correspondence with the number on Apple’s chart.
1 – Daily Data
As discussed above, each individual candle shows the price movement for a given day. As you can see on the top of the chart to the right of the number 1, there is data for the most recent trading period.
By looking at this chart, you can see on the most recent trading day (October 9th, 2020), Apple stock opened at the price of $115.28, had a daily high of $117, a daily low of $114.92 and finished the day at a price of $116.97.
You are also able to see that there was a volume of 100.5 million shares traded during the day. This is a combination of buys and sells of the stock, we will get more into that later.
Lastly, you can see that the stock as a whole changed +$2.00 (or 1.74%) during the day.This roughly ties out to the closing price minus the opening price. It isn’t perfect, but hey, at least it’s something.
2 – RSI
RSI stands for Relative Strength Index. It is a momentum indicator that shows the magnitude of recent price changes in a stock based on people buying and selling.
That may sound confusing, but it isn’t too complicated in practice. RSI splits into two main categories, overbought and oversold.
Overbought refers to when the momentum of the stock is being driven by traders and investors buying the stock. This is indicated when the RSI is over 50. The higher above 50 the RSI gets, the more buying momentum the stock has.
If you look at the figure below, when the RSI goes above 70, we see a green filling in the chart. This indicates the stock being very overbought. This means that the stock is being held by a large number of investors.
This *generally* means that a stock will be decreasing in the upcoming trading periods. This isn’t a perfect indicator for stock movement, but think of it rationally. As a stock gets very hot, it increases. This leads to more people wanting to get in on the action, driving the price even higher. But once it becomes overbought, there are less shares available to be bought, and people begin to sell their shares to lock in their gains. This leads to the stock decreasing in value, which lowers the RSI.
Again, let’s stress that it is not a perfect indicator for stock movement, but it helps in your analysis. If you take a look at the Apple chart above, whenever the RSI was increasing, the stock generally was as well.
On the other hand, when a stock is oversold, it means that the selling momentum is increasing for the stock.
When the RSI gets below 30, it is considered to be very oversold, meaning not many people own it. This hasn’t happened with Apple’s stock since it is a very popular stock that millions of people gladly buy whenever there is a dip in price.
But for arguments sake, let’s look at Intel’s chart when they released news that their chip would be delayed this past summer.
The stock decreased a ton due to people selling, and the RSI dipped below 30. As you can see, towards the end of August and into September, the stock began to increase, leading to an increase in it’s RSI.
RSI Wrap Up
RSI is a good indicator to know when you may want to buy or sell a stock. If you see an RSI of 80, it means that the stock is very overbought and will likely see a decline soon. Vice versa, when a stock has a 30 RSI, there is a good chance it may increase in the future when momentum picks up.
Keep in mind that just because an RSI is high, doesn’t mean that it won’t go higher and more importantly, when an RSI is low, it does not mean it won’t go lower. RSI is just an indicator, not a signal that a stock is definitely going to move in a specific direction.
RSI should be used to help your decision, but it should not make your decision.
3 – Overlays
On the chart, you will see a blue and red line. These are the 50 day moving average and the 200 day moving average. These can be adjusted on stockcharts.com to other indicators, but these are the ones that many investors and traders review when making decisions.
In this section of the chart, you can see the most recent price of these moving averages, with their corresponding color lines on the chart. More on these later.
4 – Candles
I probably should have started with these, but here we are. Candles.
We spoke briefly earlier about candles, but let’s go more in depth here.
Candles show the daily price movement of a stock with the Open, High, Low and Close prices.
The image above sums it up pretty clearly. On the stockcharts charts, the green candles are actually white.
White candles are when the stock closes above it’s open price (daily gain) and on the opposite side, when the stock closes below it’s open price (daily loss), the candle will be red.
In reviewing a chart, you may see a few black candles. This happens when a stock opens above the previous day’s closing price, then closes below that day’s opening price.
For example: On Day 1, a stock closes at $5.00. On Day 2, it opens at $5.50 because of positive news, but then it closes at $5.25. This would lead to a black candle.
5 – 50 Day Moving Average
The 50 Day Moving Average is a trailing price average over the previous 50 days, or… exactly what it sounds like.
It averages the price of the previous 50 trading days and updates daily on the chart.
This is useful because many traders see it as an indicator to buy or sell.
If you take a look at Apple or Intel stock charts, you can see that the stock price will sometimes jump off of the line, because it indicates that it is a line of support. Meaning that people will buy and it won’t go below that line.
On the other hand, sometimes it will hit that line and shoot downward. This is considered a resistance line. The 50 and 200 Day Moving Averages constantly act as support or resistance for stock prices.
While it isn’t a perfect science, stock prices sometimes work perfectly with their moving averages. Some traders also use 20 or 100 day moving averages as well.
6 – 200 Day Moving Average
This line is the same idea as the 50 Day Moving Average, but for the previous 200 trading days.
This is generally a “stronger” line to refer to, because it has more historical data of the stock being close to that price.
Take a look at the 200 Day Moving Average on Intel’s chart. The stock price bounced perfectly off of it multiple times in June and July, it wasn’t until they released bad news that the stock plummeted. Before that, traders saw the stock trading close to the 200 Day Moving Average and saw it as a support line. At the same time, it was using the blue 50 Day Moving Average as a resistance.
7 – Volume
On the bottom of the chart, you will see a lot of red and green lines faded in the background. These lines indicate the daily volume for the stock.
The entire volume bar indicates the total shares traded for the stock on a given day, regardless of buy or sell.
When a volume candle is green, it means that there were more buys than sells of the stock during that day.
On the other hand, when there are more sells than buys, the candle will be red. These generally correspond with the stock prices movement during that given day.
Generally, more volume will mean a more rapid movement in the stock price. More volume means more volatility. More volatility will lead to a larger increase/decrease in RSI and in the stock price.
Overall Stock Chart Comments
When trading or investing, it is best to view as many indicators as possible. This means using both fundamental and technical indicators.
You cannot rely on one indicator alone, simply because it doesn’t tell the entire story. It takes a ton of time to research a stock and decide to buy, and we should look for as many confirmations as we possibly can.
To learn more about how to pick a winning stock, we offer a course that runs through every indicator you will need from both a fundamental and technical standpoint.
If you have any questions regarding stock market investing or about the course, feel free to reach out to us at firstname.lastname@example.org