Learning how to read stock charts and recognize stock chart patterns can help you make smart investment decisions. Here’s how it works.
What is stock market charting?
Stock charting is the go-to tool for traders using technical analysis. Stock charts are basically line graphs showing the prices of an investment at different points in time. Other details like trading volume may also be depicted.
Stock charts are most commonly used for spotting price and volume patterns when researching stocks. But charting can also be used to research other assets like bonds, commodities, forex and cryptocurrency.
Charts provide a straightforward way to interpret an investment’s past performance and future potential. Seeing a visual representation of prices and market data can make it easier to spot patterns and plot future movements.
How to read stock charts
Here’s a simple step-by-step guide breaking down how to reach stock charts if you’re just starting out:
Find the trendline. When you look at the price chart of a stock or other asset, your first task is to spot the trendline. This will be the main line on the graph that tracks the price changes and connects them all. Take a look and see if this line is trending upwards, downwards, staying flat or if it’s moving up and down a lot.
Look for support and resistance levels. This will show you the minimum and maximum price levels that an asset trades within. Finding this range for a given period of time can give you a good floor and ceiling to work with when you’re setting up trades. But remember these lines can still be broken.
Understand the dividend schedule. Many stocks and shares will pay dividends to shareholders. For many dividend-paying stocks, this will happen a few times a year. It’s worth being aware of these dates because they can temporarily push the price up or down, before or after a payout.
Learn about past volume. At the bottom of most charts, you’ll notice lots of small vertical lines. These show the historical trading volume of an investment. High or low trading volume can coincide with news and it shows if the asset was being bought or sold by many or few investors.
Types of stock chart patterns
Here are some of the most important stock chart patterns you might come across:
Ascending/descending/symmetrical triangles
Pennants: 2 converging trendlines
Flags: 2 parallel trendlines
Wedges: 2 converging trendlines angled up or down
Double bottom/top: Short-term swing followed by a failed attempt to break a resistance or support level
Head and shoulders: 2 smaller price movements on either side of a larger movement
Rounding top or bottom: U-shape at the bottom or top
Cup and handles: Bullish pattern with a pause in the upward momentum
Gaps: Empty space between trading periods where there’s a price jump
Which stock charts are useful for trading?
The best charts to use for stock trading clearly show the previous prices and trading volume for a particular stock or asset. The most popular types of charts used for trading are:
Line charts
Bar charts
Candlestick charts
Where can you read a stock chart?
If you’re looking for basic historical price and volume data, you can access plenty of charting tools from major finance publications and websites.
It can sometimes be difficult to find charts for less popular investments or charts that show comprehensive historical data. Most free stock charts only cover a certain period of time, say, 5-15 years. You can find these basic charts from:
Google Finance
Yahoo Finance
The Motley Fool
Morningstar
Hargreaves Lansdown
Stock charting: Benefits and warnings
Benefits
Understand historical price movements at a glance
Easily spot uptrends and downtrends
Visualized price patterns can reveal investment volatility
Helps you find low-risk entry and exit points for trades
Provides a solid overview for an investment when paired with fundamental analysis
What to watch out for
Interpreting stock charts isn’t an exact science
There’s no guarantee that stocks will move according to a predictable pattern
Charts don’t provide everything you need to know about an investment
Chart interpretation can be subjective
Relying on charts can be time consuming given how often investments change in value
Open a stock trading account
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Bottom line
Learning how to read stock charts and spot chart patterns can help you understand securities thoroughly and make smart investment choices. But charts don’t tell you everything about an investment, so make sure you reference other research tools and data sources before making any trades.
Stock charting is when you use detailed graphs to get a visual representation of the historical price and volume data for stocks or other securities.
Stock charts help you easily spot major price trends and align your investments accordingly. Detailed charts provide a very useful snapshot of how an asset has performed and how it may perform in the future. But remember that predictions are never guaranteed. Investments may perform differently than expected.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
George is a deputy editor at Finder. He has previously written for The Motley Fool UK, Nasdaq, Freetrade, Investing in the Web, MoneyMagpie, Online Mortgage Advisor, Wealth, and Compare Forex Brokers. He's focused on making personal finance and investing engaging for everyone. To do this he draws from previous work and his Level 4 Diploma for Financial Advisers (DipFA), sharing what he’s learnt. When he’s not geeking out about money, you’ll find him playing sports and staying active.
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