For new investors, a stock market chart can be a confusing blur of numbers, colours, and lines when you first lay your eyes on it.
However, if you want to generate significant wealth, it is vital to know how to make sense of these charts because doing so will enable you to better interpret trends on the stock market, spot opportunities for buying and selling, and generally make savvier decisions overall.
While they might confound you at first glance, stock charts are actually relatively straightforward once you’ve got a grip on what kind of information they are providing you with. The tricky part is understanding how to do so.
But don’t worry, we’ve got you covered!
By breaking down the technical analysis into simple to comprehend language, our guide will give you a better appreciation of how you can best explicate their data.
What exactly is a stock chart?
Before we outline how to read one, it is a good idea to clarify what exactly is a stock chart.
Basically, a stock chart presents a visual snapshot of how a particular stock price, for instance, ASX TLS, has performed over a specific time period.
Alternatively referred to as a ‘price chart,’ it provides a range of data pertaining to any given stock, such as its opening and closing prices (on a daily, weekly, and monthly basis), how many shares were traded in that period, and its lowest and highest prices during that time.
The purpose of these charts is to determine trends and patterns that have dictated the behaviour of individual stock prices and to identify the best way to formulate more successful investing decisions.
How To Read a Stock Chart?
Every stock chart contains key metrics that should influence your thinking. The main ones to look out for include:
1. Time Axis (X-Axis)
The x-axis is the horizontal line at the bottom of the chart. It represents a specific time period, which could be a day, week, month, or even longer, depending on what type you are referencing.
2. Price Axis (Y-Axis)
The y-axis is the vertical line on the left side of the chart. It showcases how the stock price has risen or fallen over the timeframe.
3. Volume
Typically rising in a bar form from the x-axis, volume highlights how many individual shares were traded over a certain period.
If there is a high volume, it can indicate there is a strong current interest in a stock, which, in turn, could signal that a possible price move is on the horizon.
4. Trendline
By connecting different points on the chart, a trendline provides an instant representation of how the stock has moved. Usually, this pattern is referred to as bullish (upward), bearish (downward), or neutral (sideways).
It is important to recognise that although a stock chart can be an effective tool for understanding how a particular stock has performed, you should not rely on it solely.
Here are some other strategies you should use to research the investibility of a stock.
What are the different types of Stock Charts?
Overall, there are three different types of stock charts – bar, candlestick, and line.
The reason for this is that each of them presents the data in a slightly different way, which suits the varying analytical preferences of a wide range of investors.
For those wanting in-depth information on stock prices on an intraday or daily basis, candlestick and bar charts tend to be more popular because they help them identify and take advantage of current market trends.
Line charts, on the other hand, showcase a stock price’s movement over a longer period of time, e.g., a week, month, or year, which provides you with a snapshot of how it has performed over an extended period.
Which stock chart should I use?
As a beginner investor, it is wise to spend a bit of time familiarising yourself with the make-up of each of these charts to establish which one finds the most useful.
Initially, you should keep things nice and simple by sticking to bar or line charts. Then, once you start to become more familiar with them, you can explore the more detailed information you get from candlestick charts.
Ultimately, the question of which stock chart you should use will vary between individuals. However, as with anything, you should stick to the one you feel most comfortable analysing.
Tips For First-Time Investors
For a first-time investor, analysing stock market charts is an important component of the investment process.
When doing so, you should monitor their progress over a specific period of time, for instance, monthly or yearly, because this will give you more confidence in the potential they have for any particular stock to be a successful investment.
However, while these charts show how a stock price has moved, they don’t advise why it did so. Therefore, you should make an effort to understand the reasons for the changing values.
Reading financial blogs, such as A Wealth of Common Sense and The Motley Fool, is a good start. Additionally, you should also watch the news and follow the feeds of other successful investors on social media.
Perhaps most importantly, though, you must remain patient. Stocks and shares are notoriously open to significant fluctuations, although often they bounce back soon afterward.
Therefore, if your price goes south try not to panic sell. Instead, stay true to your long-term investment goals.