Understanding trading charts is an important part of ensuring that your investment decisions are poised to grow your wealth. Some traders will also use these charts to get a better understanding of where price points need to be to make sure they are getting a price that is not overvalued. These charts, when combined with news reports in regards to political trends, employment growth, interest rates, and economic growth, will help you get a more accurate picture of where your stock may be headed and whether or not the investment is a sound one.
What Are Trading Charts?
If you’re not familiar with the term trading chart, you’ve probably still seen them. A trading chart is an organized visual display of information about trades being made on an equity, such as a company’s stock.
To better understand how to use trading charts to your advantage, you will need to:
- Understand trends
- Understand the different types of charts
- Know the elements that make up a trading chart
- The time periods that may be represented in trading charts
How to Understand Trends When Reading a Stock Chart
When presented with a chart, you will be looking for groupings of data that are indicating a general direction. This will give you an indication as to whether the stock is in a path of forward motion or poised to possibly decline. With some charts, these trends will be easy to identify quickly, while others will be more complicated and take a greater understanding to determine.
In general, you will see that trends will be a series of peaks and valleys, which will be indicative of the highs and lows of the stock. A bullish trend with stock is indicated when you see successive peaks that continue to get higher, with few dips. If the trend is Bearish, then you will see more of a pattern of fluctuating highs and lows.
While trends you will be looking for will often be Bearish or Bullish, some trends may be considered flat. A flat trend is represented in a graph by a more horizontal line. The peaks and valleys will be minimal as the supply and demand will be close to equal.
When interpreting charts, you will not only classify the trend in the direction that it is headed, but also the duration that the trend seems to be occurring. Trends will typically be considered as long-term or short-term and can be easy to read when looking at a graph that represents a longer period of time.
Types of Trading Charts
You will need to be able to understand trading charts to get a better picture of the possible future direction of a stock. Part of this process involves knowing how the different types of charts are created so that you can find the right information. Traders may use different types of stocks based on their trading skill level as different charts can require a higher level of skill to be able to read. There are three common types of charts used for stock interpretation.
One of the most basic types of stock charts and the most popular type for beginning traders is a line chart. Line charts are used to represent the closing prices over a set period of time. These are considered an important type of graph because the closing price is considered one of the most vital pieces for analyzing the data in a stock trend. The points that represent the closing price will be plotted and then connected with a line, creating a visual representation of the highs and lows that the stock is going through.
A bar chart will provide more detailed information to provide a better picture of the progression of the stock. Once an investor has mastered reading and understanding line charts, moving onto bar charts can provide more information to make a better-informed decision. The chart will be created using vertical lines that represent a different level of trading information.
You will see representations of the highs and lows that occur in the trading period as well as both the opening and closing prices of the stock during a certain period of time. The open and closing prices will be represented by a shorter horizontal line, with the opening price on the left side and the closing price on the right side. The price increase will be shaded with a different color so you can see easily what was gained in value.
More experienced traders will turn to candlestick charts once they have mastered reading both line and bar charts. The vertical lines placed in the charts will show the trading period’s price ranges. The body of the chart will then use a variety of colors that will mark the changes in the market over a period of time. Shadows, wicks, and tails will be used to create a picture of the highs and lows of the stock price. The lines at the top of the graph show the highs of the close price and the bottom line will show the lower close prices.
The colors that will be used on candlestick charts often vary from broker to broker, so you will need to understand what your broker uses so that you can properly interpret the graph. When reading a chart, typically, a short body will indicate that there is little price movement, and a long body will show more movement.
Elements You Will Find on a Stock Chart
While the trading chart will mainly consist of price movement over a period of time, there are a number of informative elements that it contains. Most stock charts will contain:
- The fund or company that is being traded
- The ticker symbol used on the market to represent the company or fund
- The interval that is being measured to show the price movement
- The bid price which is the highest price someone was willing to pay for the stock
- The ask price which is the lowest price that the stock is being sold for
- The last price which indicates the price that the stock was last traded for
- The NET change which shows the difference between the last trade price and the price from the previous closing day
- The NET change percentage which indicates the percentage difference between the last traded price and the previous closing price
- The close price from the previous day
- The price that the stock opened at for the first day on the time period
- The highest price that the stock had traded at for the day
- The lowest price that it was traded at for the day
- The volume, which indicates the number of shares that have been traded during the session
Time Periods Used for Trading Charts
Stock charts can be used to represent a wide range of time frames and which one to use will depend on the type of trade you are making and whether you are choosing a long or a short position. Some of the most commons time frames for trading charts include:
- Monthly: Monthly charts are mainly used to look at an indication of prices in the long-term horizons. They will be more often used by long-term investors who have been investing for a longer period of time.
- Weekly: These are also used by traders who are looking more at the long-term horizon, but are not beneficial for looking at the immediate term trends. These should typically be reserved for those looking to analyze periods for more than six months.
- Daily: These charts represent a one-day interval of stock in any given trading day and are typically the most common charts used by investors. You can look for information in the short and intermediate-term time periods. While these are typically used for analyzing periods over six weeks, many long-term investors use them in their research as well.
- Intraday: Intraday charts are also another popular chart with traders as it can show fluctuations in prices from the opening of the trading day before the close.
- Intraday hourly: A more detailed representation of what is going on during the trading day on a specific stock are intraday hourly charts. In these charts, you will see the highs and lows for each hour interval starting after the opening bell. These charts are ideal for short-term trades.
- Intraday 15-minute: These charts are similar to intraday hourly charts except for the fact that they represent the highs and lows for each 15-minute period throughout the day.
- Intraday 5-minute and 2-minute: These types of charts are often used by longer-term traders to time their entry and exit points better when planning their longer-term trades. They will often show trading fluctuation in a three hour period. The charts are also a popular choice for scalping or day trades as well.
Knowing how to read and appropriately interpret charts can provide you with a better foundation for making well-informed trades that can help improve your financial situation and grow your wealth. Want more information on how to interpret stock charts? Sign up for one of our online webinars or download our free e-book.