How to Read Stock Charts and Trading Patterns

how to read stock charts

In summary, when you think of distribution days, think of the word “distribute”, or selling, or heck, the color red. With a distribution day, there is simply more net sellers than buyers. Below I have taken a stock chart of the NASDAQ Composite and labeled the main parts. Below the chart I will explain these parts and what they mean when it comes to reading a stock chart. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources.

how to read stock charts

Accumulation days are very positive events, because they signal underlying strength due to the fact that institutions are accumulating shares and pushing the stock price higher. The more buying investors do, the more accumulating that is going on, how to read stock charts and thus more a stock price will rise. Candlestick charts – This chart presents the same data as a bar chart, but in a slightly different format. The first is the thin line, known as the “shadow,” which shows the price range from high to low.

Frequently Asked Questions from Investors

Volume represents how much demand there is for a particular stock. A stock chart is a graph that displays the price of a stock—or any type of investment asset—over a period of time. It typically shows the current price, historical highs and lows, and trading volumes. Looking at a stock chart is one of the easiest ways to get a sense for how the stock’s price has performed over a certain period of time. With price per share on the y-axis and time on the x-axis, you can quickly see where the stock has been trading.

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A bar chart has a vertical bar denoting the range in which the price fluctuates during the interval. There is a horizontal bar on each side (feet of the bar) that denotes the opening and closing price of the stock in the interval. The foot on the left side is the opening price, and the one on the right side is the closing price. The height of a candlestick represents the difference between the opening and closing prices for the interval, the wick/shadow length representing the highest and lowest prices respectively. Similarly, you can analyze any stock based on the period and interval you want.

Common stock chart terms to know

Securities and Exchange Commission as an investment adviser. SmartAsset does not review the ongoing performance of any RIA/IAR, participate in the management of any user’s account by an RIA/IAR or provide advice regarding specific investments. Besides understanding stock charts, there are other analytical tools you should use, and a financial advisor can help you find and benefit from these valuable resources. Some investors might prefer a bar chart over a line chart because they believe it better reflects market sentiment in the price action of a security. In other words, you can see if other investors are bullish…or bearish…on a stock.

how to read stock charts

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Spotting trends, support, and resistance

A breakout occurs when the stock finally moves out of the trading range to the upside on heavy volume. Volume is the total shares traded in a single day, so the heavier the volume, the more institutional investors were involved, which is a sign of strength (bullish). At first glance, stock charts appear to be a chaotic show of lines, colors, numbers and acronyms.

The wider area, known as the “real body,” measures the difference between the opening price and the closing price. If the close is higher than the open, the real body is white. To answer these questions, technical traders typically use multiple indicators in combination. The fluctuation in bar size is because of the way each bar is constructed.






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