Learning to read stock charts and understanding some basic charting patterns can elevate your ability as a trader or investor. It’s a topic that may look slightly confusing at first. But, once you get to grips with the fundamentals, you’ll be making better trades in no time at all.
What is stock market charting?
This is the main go-to tool for traders using technical analysis. It’s basically a graph showing the price of an investment over a period of time. Sometimes, containing additional details like trading volume.
Charts are most commonly used for spotting share price and volume patterns when researching stock trades. But, there are also charts available for other assets such as bonds, commodities, forex and cryptocurrencies.
Why is stock market charting useful?
Seeing a visual representation of prices and market data can make it much easier to spot patterns and plot potential future movements. If you only looked at figures on a page, it would be much harder to understand what’s going on with an asset. Charts can provide a straightforward way to interpret an investment’s past history and its future possibilities.
The best way to think of charts is like a map. It plots where an asset has been and where the price might go in the future. Stock charts don’t reveal guaranteed steps to trading success. But, they do show potential paths that a stock or other assets could follow.
What charts are useful for trading?
The best charts to use for trading will be ones that clearly show both the previous prices and trading volumes for a particular stock or asset. The most popular types of charts used for trading are:
- Line charts
- Bar charts
- Candlestick charts
How do you learn to use stock market charting?
The best way to learn how to use charting to your advantage is through practice. There are loads of free resources on the internet that let you look at past and real-time data. Before you start making trades, get a good grasp of charting basics. The more you look at these graphs, the more familiar they’ll become.
Research one strategy, method or pattern at a time. Then, have a go at implementing what you’ve learnt. Pick any stock you like, find the price chart and practice repeatedly looking at pricing patterns across different timeframes.
What are the different types of charting patterns?
To get a complete understanding of the most popular charting patterns, it’s worth researching each one individually so that you can see some visual examples of what to look for.
Here are the names of some of the different types of charting patterns you’ll 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 – a 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 – a U-shape at the bottom or top
- Cup and handles – bullish pattern with a pause in the upward momentum
- Gaps – an empty space between trading periods where there’s a price jump
How do you read charts?
Here’s a simple step-by-step guide explaining a basic method you can use to read charts for stocks and other investments when 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. This will happen a few times a year for most dividend-paying stocks. It’s worth being aware of these dates because they can temporarily push the price up or down, before or after the payout.
- Learn about past volume. At the bottom of most charts, you’ll notice lots of small vertical lines. This shows 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.
Where can you read a stock chart?
It depends on how detailed you want your charts. If you’re looking for basic historical price and volume data, you can find plenty of charting tools available on major finance publications and websites.
Sometimes it can be more difficult to find charts for less popular investments. Or, charts that show the complete past data for an investment. Most charts available for free will only cover a certain period of time, perhaps just going back 5, 10 or 15 years. A few places you can find these basic charts include:
- Yahoo Finance
- The Motley Fool
- Hargreaves Lansdown
What are the pros and cons of stock market charting?
Here’s a quick rundown of some of the major benefits and drawbacks of using stock charts to evaluate an investment.
Pros of learning about charting
Understanding these charts will allow you to become a more successful trader. When it comes to investing and trading, information is power. Here are some of the main advantages of learning how to use charting to evaluate an asset:
- With just a glance, you can get a general understanding of historical price movements.
- The ability to easily spot uptrends and downtrends.
- They allow you to see visual price patterns and get an idea about the volatility of an investment.
- Help you find lower-risk entry and exit points for trades.
- Used alongside fundamental analysis, you can get a complete overview of an investment.
Cons of charting for stocks
Here are some of the main drawbacks when just using charts to make trading or investing decisions:
- Reading charts for stocks and other investments isn’t an exact science.
- They can show overarching patterns, but when you spot the beginning of a pattern, there’s no guarantee the rest of that pattern will develop.
- Used in isolation, they do not give you the full picture of an investment.
- Charts can be interpreted in different ways, subject to varying opinions.
- Things can change quickly so it can be time-consuming to keep on top of every price movement.
Learning how to read charts for stocks and other investments is an excellent way to build upon your existing investing knowledge. It will allow you to gain a much more thorough understanding of an asset and its price movements over time.
Yet it’s important to keep in mind that these charts don’t tell you the full story about an investment. So, before you make any trades based purely on charts, ensure you also do some wider research to fully understand an investment.
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