How to Read a Stock Chart?
Stock chart can be defined as pictorial/ graphical representation of a price of stock plotted for a period of time i.e. either daily, weekly, monthly, yearly etc containing items like stock symbol, stock exchange details, price details like open, close, highest, lowest etc. and trade volume details i.e. quantity of stock bought and sold providing insights about the direction in which stock will be moving.
The essentials of the stock chart need to break down, and key things should be focused on reading the stock chart.
Step 1 – Identify the Trend Line
It is the orange line that is seen every time on the stock chart that goes up or downright. A stock may take huge dives and/ or make huge climbs. An investor or trader should not react to large drops or huge gains in negative or positive ways. Rather, this trend of the line should be used just to understand what is going on in the market regarding a particular stock. This trend line helps one to analyze further. Any news related to stock will come and go, but when news coincides, there is a dramatic shift in the trend lineTrend LineA trend line, often known as the best-fit line, depicts the data's trend. It shows the overall trend, pattern, or direction based on the data points available. which needs to be paid attention. Therefore, the trend line should be used as a high line of indicator to invest in stocks.
Here, XYZ Stock price was trading normal and suddenly on day five any negative news, say Virus entry in the trading country, just got on the TV. Accordingly, the market started reacting negatively to it.
Step 2 – Look for Lines of Resistance and Support
The next step is to read a chart that is the lines of resistance and support. The levels are the price at which the stock remains for a particular period of time. The support level is a cost below which stock is improbable to fall, while resistance level is the level or price above which a stock price is unlikely to go. The level of resistance and support is unlikely to change unless a drastic shift in the market takes place like lower marginal profit. A stock price bounces back and forth between the inflated barriers of support and resistance. The main purpose of the level of resistance and support is to know when to buy and sell a stock. These levels are subjective and can be interpreted differently by different individuals. If a stock is held on for a long time, lines of support and resistance may not be of much importance, but for a short-term investor, these lines may be crucial.
As visible here, marked with red lines are different resistance and support levels over a period of 10 days.
Step 3 – Know when the Dividend and Stock split occurs.
In a stock chart, at the bottom, one can see if and when the company has issued a dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. and if there was and stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly. ever. When the company’s board of directors opts to provide its earnings share to its shareholders in the form of dividends, the shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. earns a marginal profit through this dividend. Although all companies do not issue dividends if any company does not issue dividends, this should not be interpreted as no worth investing in it. Plenty of other factors needs to be considered. Like some companies prefer to reinvest their earnings rather than giving it back to the shareholder’s such companies focus on growth.
A stock split is a move strategically done by the board of directors of the company to issue additional shares to the public. It doesn’t change the value of the company but changes its price. Generally, companies go for a stock split if the price is not in line with a competitor or to attract small investors when the share price decreases.
Here, on day 5, the company announced a dividend payableDividend PayableDividend payable is that portion of accumulated profits that is declared to be paid as dividend by the company's board of directors. Until the dividend declared is paid to the concerned shareholders, the amount is recorded as a dividend payable in the head current liability., thereafter stock prices can be seen rising as the stock starts trading at a cum-dividend price.
Step 4 – Understand Historic Trading Volumes
At the bottom of the chart, multiple small and vertical lines show the trend of stock traded volume. Any major news about the company, whether good or bad, increases the trading volume. An increase in volume may also shift the price of the stock quickly.
In the above example, the company announced a dividend, and accordingly, a spike in traded volume can be easily identified in the below chart.
Types of Stock Chart
The following are the basic types of stock charts:
- Line Stock Charts: One of the basic charts that give the least information. The line is drawn using the closing price for each unitPrice For Each UnitUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization. of time.
- High Low Close Bar Stock Charts: Each bar represents the trading period, with the price being high low and close represented.
- Open High Low Close Bar Stock Chart: This represents a complete bar chart that includes the open price and close price in the day’s trading.
- Japenese Candlestick Chart: It is widely used in Japan that gives an excellent insight into the current and future price movement.
- Volume At Price Stock Chart: This is the new development in the stock chart that shows the volume of trades at a specific price level.
- Equivolume Stock Charts: These charts provide the Volume at Price in a different manner.
Stock Charts Volume
Stock chart volume is the number of shares traded during a time period. It is plotted as a histogram under a chart where volume represents the level of interest in a stock. If a stock is trading low in volume, it means there is low interest in the stock market and vice versa. It also represents the liquidity constraint in a stock. Low volume refers to illiquidityIlliquidityIlliquid refers to an asset that cannot be converted to cash. Such assets suffer a valuation loss when sold in exchange for cash. Bonds, stocks and properties are some examples of illiquid investment., and high volume can be interpreted as stock possess high liquidity. It is used by swing traders.
Stock Chart: Resistance Levels
The resistance level in stock charts is the price from which there is no further rise. It is always about the current market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.. It is a point on the chart where the traders will expect maximum supply for the stock. It is a technical analysis tool that the market participants look at the time of the rising market. It is unlikely of the stock price to rise above the resistance level, consolidate, absorb all the supply, and then see a high decline.
This has been a guide to How to Read a Stock Chart?. Here we discuss how to interpret trend lines, support and resistance, trading volumes, and types of stock charts. You may learn more about excel from the following articles –