Reading Stock ChartsSunday, January 24, 2010 6:19 pm
Online trading is growing by leaps and bounds.Â Itâ€™s no surprise, since advances in technology give the average individual the ability to learn how to read stock charts and make their own decisions on which stocks to purchase and when to sell.Â Â You too can get in on the investment game. With just a little know-how, you can soon be reading the daily stock report and choosing stocks to invest in.Â When you have the power to affect your financial future, why wait?
Technical analysis is the term for reading stock charts.Â Essentially, this analysis is a method of forecasting the future price movements using price/volume movement history. Technical analysis is not 100% accurate in forecasting financials, but it is a highly valuable tool for finding high reward, low risk trade opportunities.Â While it may sound like jibberish for the newbie, learning how to read stock charts is something anyone can learn to do.
Your first step in understanding how to read stock charts is to understand what a chart is and what it can do.Â A chart is just a sequence of prices and values plotted over a period of time. On the vertical axis of a chart is the price; with time being represented on the horizontal access. Time is plotted oldest to newest from right to left. Any security (stock, option, commodity, or future) with price data over a period of time can be charted to form an analysis.
There are three types of charts you can learn to read: The Line Chart, the Bar Chart, and the Candlestick Chart.Â Donâ€™t be overwhelmed!Â We will take a look at each of the types of charts here.
The Line Chart is the most basic form of price display.Â This chart is built using only the closing price for the stock in each time period. It is believed by some traders that the closing point is more important than the open, high or low because it disregards intra-period price swings. Line charts are also used when the additional data is not available. Some indices and thinly traded stocks donâ€™t have enough adequate price data for other types of price displays.
The Bar chart displays price using a single bar for each time period that displays the open, and the high and low.Â A small horizontal bar shows the open and another shows the close for that period. The benefit of using bar charts is that you can fit much more readable data inside a time frame because each bar is quite slim.
Invented in Japan centuries ago, candlestick charts were originally used to forecast the prices of rice.Â Over the past several years, candlesticks have become the most popular style of price display. A single candlestick is constructed of an open, high, low, and close. The body of the candle is colored based on if the close was higher or lower than the open price.Â Using charting or trading platform software, you can select your own custom colors for your chart. It is recommended that you used a light color for up candles and a dark color for down candles, making it easier to read the data.
Much more involved than simply reading the daily stock report, reading stock charts is a challenge; but one that is oh so rewarding.