How to Read Stock Charts for Beginners

Daniel Penzing
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Do stock charts look like an unsolved riddle to you? Read our guide to demystify the financial world.

There's one financial place you need to visit regularly – the stock exchange. It's the place where investors exchange shares of popular bluechip stocks, like Facebook and Apple. But how do stock charts work? What do all the lines and squiggly shapes on a chart mean? Does it hold all the keys to making you rich? And, ultimately, how do you read a stock chart?

A little of what you don't know about stock charts can be a dangerous thing. A lot can be detrimental to your finances. The finance industry has long been a mystery to most people; they don't understand the basics of the financial world. Good thing you landed on this page!

In this post, you'll learn the nuts and bolts of the stock charts, so spread out your notepad because there's a lot to cover.

What You Might Be Confused About

You might be wondering why stock charts exist. After all, if you know how to read it, your investment probably isn't that sophisticated. There's a possibility that you might be jumping into something you don't fully understand. A lot of people think of stock charts as some sort of riddle. They don't know what the squiggly lines and the numeric values mean.

What Do Stock Charts Tell Us?

You may find it difficult to understand what a stock chart is trying to tell you. There are a lot of numbers, lines and symbols, and sometimes, it’s hard to keep up with them. Sometimes, it’s just plain boring to read through charts. But stock charts can tell you a lot about a company’s performance. They can also indicate to you when it is a good time to buy.

Here’s a quick summary of the some of the most important things to look for when you’re trying to make sense of a stock chart.

Is the stock price in an uptrend?

When you look at a line that shows how much the stock is going up or down, is it going up a lot, or just a little? If there is a large upward line, this is called an uptrend. It will tell you the price of the stock is rising. If the line has small dips, but overall has moved upward, this is a sideways price change. If you see a downward trend line, this is called a downtrend. It tells you that the price of the stock is going down.

How fast is the stock price going up / down?

How to Read Bar Charts

If you know parts of the stock market then you have certainly heard of financial charts. Charts are tools to provide visual representation of historical and market information. They are used for a large number of purposes that include financial analysis, data interpretation and market analysis. Charts are important to organize and process large amounts of data.

If you are a first time investor then charts can be confusing. In order to start reading them you need to understand the structure of a chart, the information it provides and how to interpret charts.

There are three common types of stock chart that are used in the stock market. They include Bar Charts, Line Charts and Candlestick Charts. Candlestick charts are more popular in the United States and Bar and Line Charts are more popular in the United Kingdom.

Bar charts are most widely used charts in the stock market. They are used for visual representation of price movements over a specific time frame. Bar charts are used to identify price movements and patterns of data, to interpret past trends, to predict future trends and to analyze historical performance.

A bar on a chart represent price movement over a specific day or period of time. The length of a bar on a chart is indicative of price movement for the period. Bar charts are easy to read because they clearly convey information and lack complicated technical details.

The main categories of Bar Charts are:

A Closer Look at a Bar Chart

In this post, we will examine the various components of a bar chart so that you can better understand what you’re looking at when you use a bar chart to track the performance of a stock.

The Y-Axis

The y-axis shows the number of shares. You can choose from one of three y-axis scales: simple, percent, and relative. The simple scale is the default y-axis scale, and it lists the numbers of shares. When you choose this y-axis scale, you will have access to the option to subdivide the vertical axis (more on that in a minute).

The percent scale is used to measure the performance of a stock by showing percentage changes in value. Most people use the percent scale when they are comparing different stocks. The relative scale shows how a stock performed during a particular time period, such as one day, week, year or even five years (relative to its industry, the S&P 500 or the Dow 500).

The X-Axis

The x-axis shows dates. If you choose a simple y-axis (as we show above), you will be limited to the available x amounts of time. However, if you choose a relative or percent y-axis scale, you will have the option of choosing the x-axis amounts of time.

Spikes and Trendlines

One of the biggest mistakes first time investors make is trying to predict the market. If you spend time watching the financial news networks it is easy to fall into this trap.

Don’t worry about predicting the market, try to analyze the data.

When studying stock charts technical analysis can be a valuable resource to traders and investors alike. Technical analysis can help you project the future price of a stock or sometimes give you insight to other potential factors before the stock reaches a major turning point.

One of the best resources available to new traders is the internet. Today, you can find a library of stock charting software and indicators at your fingertips and for free. The problem with free stock charting software is there is a certain amount of trial and error as you learn to read stock charts for beginners.

Stock charting can also help you put into perspective the volatility of a stock and its impact on your portfolio as well as help you understand other investment possibilities.

Professor Plum, in the Library, With the Candlestick…

Depending on who you’re speaking with, stocks and stock charts are either a “buy, buy, buy!” investment tool or an elaborate version of “hide and go seek.” However, at the core of this perplexing investment/plaything for adults is an incredibly straightforward and simple tool.

Stock charts, also called stock graphs or stock price visualizations, are a visual representation of data. All stock price data is based on a particular time period, such as a year or a month. This data is filled, meaning it is filled in with the stock’s closing price at the end of the day. Data is organized horizontally, and the prices progressively get higher as they go up the line.

Financial brokers and stock traders use stock charts extensively, and in many situations, these same stock charts are available to the sites that sell stock. This makes it easy for investors and buyers to access basic information on their stocks without having to figure out how to view stock charts. The amount of data that is provided on the chart varies from provider to provider, but most charts include data on the opening price, closing price, closing price from the previous day, trading volume and the highest and lowest prices.

Practice Reading Charts with TD Ameritrade

This article has a nice, simple format for chart reading that you can use to practice. You will also find a list of explanations for each of the different types of charts to help you understand what each means.

Once you understand how to read a basic chart, you can start to learn more advanced concepts like trendlines, support and resistance, and candlesticks. Here are some resources to help you learn those concepts as well.

And finally, when you’re ready to see how technical analysis can benefit your portfolio, you can sign up for a free account with TD Ameritrade. You’ll get access to a free charting tool, plus practice materials and lots of education on investing.