So, you want to get started in the stock market? That’s an exciting move, giving you a way to let your money work for you. But before you dive in, you should take the time to learn something that all beginners should learn — how to read a stock chart.
In a single chart, you’ll find all kinds of data ranging from historic performance to the real-time stock price. In the same chart, you’ll find indicators that suggest the best time to buy and sell as well as fundamental data that points to the strengths and weaknesses of publicly traded companies.
While stock charts may look different from one brokerage or provider to another, the basics all remain the same. Here’s what you need to know.
Types of Stock Charts
There are several types of charts, with the most commonly used being line, candlestick, bar, daily vs. weekly, and point-and-figure charts.
For the most part, the structure of these charts is relatively similar. On the X axis, you’ll find the price of the stock and the Y axis lists the time at which the price was recorded. Here are the details of each commonly used kind of chart:
1. Line Charts
Line charts are arguably the most popular charts among investors. Even Google and Yahoo! Finance display line charts as their defaults. As with all stock charts, the X axis represents price while the Y axis represents time. From there, a line plotting prices at different points shows the direction and historic performance of the stock or other financial asset.
2. Candlestick Charts
With candlestick charts, instead of having a line plotting prices, these charts have red (for price decreases) and green (for price increases) candlestick shapes to indicate price movements. Each stick shows the open price, closing price, high price, and low price. A wide body of each candlestick represents the range between a stock’s open and closing prices; the wicks on each end represent session highs and lows.
3. Bar Charts
Bar charts resemble candlestick charts, but what would be the body of the candlestick isn’t filled in. Instead, the top and bottom of each bar represent the high and low price, while horizontal lines between bars show the prices at which the stock opened and closed each trading period.
4. Point-and-Figure Charts
Point-and-figure charts are the only style of stock chart that doesn’t follow the traditional structure of displaying open, close, high, and low prices over a period of time. Instead, these charts emphasize the closing prices of financial assets.
The idea is to give investors a way to weed out the noise created by minor up and down movements and depict the grand scheme of things from a supply-and-demand perspective.
On these charts, there is no time axis, only a price axis. When the price of a stock closes higher than the previous close, a column of X’s is plotted on the chart, while declines are plotted with columns of O’s.
5. Daily Vs. Weekly Charts
You may wonder whether you should use a daily, weekly, or monthly stock chart to make your stock market decisions. For several reasons, the best course of action is to look at all of them. Each can give you important information:
- Daily Stock Charts. The daily chart is best used once you’ve done your research and you’re ready to execute your trade. By analyzing the daily chart, you’ll be able to determine the direction of the asset in the current trading session, telling you whether you’re better off buying right now on a stock that’s likely to end the day higher, or wait until the closing bell nears on a stock trending down in the current session.
- Weekly & Monthly Charts. Weekly and monthly charts are beneficial when determining whether to invest in a stock at all. These charts help to weed out the noise of daily price movements, outlining broader trends. These charts also help to weed out the emotion caused by minute-to-minute price movements, giving you an opportunity to invest with a clearer mindset and a higher probability of profitability.
Stock Chart Components
While each style of chart is different, they generally show the same data about a stock. You can find this data through a series of stock chart components, including:
Company Name, Exchange, and Ticker Symbol
When reading a chart, you’ll want to make sure it reflects the right company. Lots of companies and ticker symbols are similar to one another.
To ensure you’re looking at the stock for the correct company, find its full name, generally found at the top right of the chart, along with the exchange the stock trades on and the ticker symbol that represents the stock. An example of this is outlined with a red circle in the image below.
This chart shows data from Apple Inc., a stock that trades on the Nasdaq exchange under the ticker symbol AAPL.
Charts use the term “Open” to list the opening price of a stock when the trading session started. An example of this is outlined with a red circle in the image below.
This chart shows the opening price of Apple stock in the December 1 trading session was $166.16.
The previous close gives the closing price of the stock on the previous trading session. To find the previous close, open a weekly chart and hover your mouse over the previous day on the chart. An example of this is outlined by a red circle in the image below:
Apple stock closed at $166.10 at the end of trading on December 1, 2021.
High and Low
Highs and lows are important because they show the range of the stock’s price throughout the course of the trading day, showing the highest and lowest prices during the session.
Highs and lows also help gauge the volatility risk associated with the trade. Stocks with high volatility will generally have a wider gap between highs and lows than stocks with low levels of volatility.
An example of daily highs and lows on a stock chart is below:
On December 1, 2021, Apple reached an intraday high of $166.25, and the lowest price experienced during that trading session was $165.71.
The market capitalization, or market cap, is a key fundamental measure representing how large the company is. Small-cap stocks come with increased risk, while large-cap stocks offer more stable growth. On the other hand, small-cap stocks have historically outperformed their large-cap counterparts.
Most stock charts list a company’s market cap in the stock summary rather than on the price chart itself. On Yahoo! Finance, pictured here, this data is available next to the stock chart before the chart is expanded to full screen and indicators are added:
At the time of writing this article, Apple traded with a market cap of $2.687 trillion.
The price-to-earnings (P/E) ratio compares the stock price to the annual earnings per share the company generates. For example, if ABC stock generates $1 in earnings per year and costs $10 per share to buy, it’s P/E ratio is 10.
Take a look at the example below:
The chart shows that Apple’s P/E ratio was 29.05 at the time of writing. That means at Apple’s current stock price, buyers of its shares are paying $29.05 for each $1 of earnings Apple generates.
The dividend yield is the annual dividend expressed as a percentage of the share price. For example, if a $10 stock pays an annual dividend of $0.50, its dividend yield is 5%.
The image above shows that at the time of writing, Apple paid an annual dividend of $0.88 per share, working out to 0.53% of its share price. That means each share of Apple stock you own would yield you $0.88 in dividend payments during the year.
52-Week High & Low
The 52-week high and low are important technical levels, often perceived as the strongest points of resistance because they represent the highest and lowest prices a stock has experienced over the past year.
When a stock breaks past its 52-week high or low price, there’s a strong chance that significant movement will take place, continuing the upward or downward trend.
Take a look at the chart below:
Over the year prior to this writing, Apple traded with a 52-week low of $116.21 and a 52-week high of $170.30.
Price and Volume
Stock charts give you the real-time price as well as price changes over time. Price changes over time are tracked by the lines on line charts and bars and candlesticks on their respective charts.
These charts also outline trading volume. High volume suggests that the stock is actively traded. That means liquidity — or the ability to sell when it’s time to exit your position — won’t be a problem. On the other hand, a stock with low trading volume could present liquidity issues in the future.
You’ll find examples of price and volume data outlined by red circles in the image below:
In the chart above, Apple was trading at $163.24 per share as of 1:15 pm on December 2, 2021. The volume data in the chart shows that a whopping 2.19 million shares of Apple stock traded hands the day before, suggesting liquidity is not an issue with the stock.
Trend lines are tools used for technical analysis that outline the direction and veracity of an uptrend or a downtrend in price movements. These trend lines are created by connecting with straight lines the highest or lowest price points a stock has reached. The trends revealed can help to determine what the future of a stock might hold.
In the image above, the red trend lines have been drawn connecting both the highest and lowest points experienced by Apple stock over the course of a week. The lines point to a week in which Apple achieved a series of higher highs and higher lows, suggesting the stock will continue trending upward overall, even though it has just sold off a bit after hitting a peak.
Moving Average Lines
Moving average lines track a stock’s average price over a period of time. For example, the 50-day moving average averages the closing price of the stock over the past 50 trading days. Tomorrow, the oldest closing price in the average falls off, and today’s closing price is averaged in, giving it the name “moving average.”
Moving averages are important when stock trading because they help to smooth out the noise of everyday volatility and reveal broader price trends over longer time periods. See the image below, with the 50-day moving average for Apple’s stock drawn in purple:
The 50-day moving average line is far less jagged and provides an easier-to-comprehend view of the current trend of Apple’s stock.
Traders often look for crossovers in the 50-day moving average, which happen when the stock price (the blue line in the image above) crosses the moving average line. When the price crosses below the moving average line, the crossover is considered a bearish sign. Bullish crossovers happen when the price climbs above the moving average line.
Relative Strength Line
The relative strength index, or RSI, is a technical indicator that helps investors and traders determine whether a stock is overbought or oversold. Overbought stocks are often primed for a downward correction, while oversold stocks are often gearing up for positive movement ahead.
When the relative strength line is added to a stock chart, a new, smaller chart appears at the bottom. This displays the RSI data.
Generally speaking, an RSI of 80 or above suggests that the stock is overbought, while an RSI of 20 or below suggests oversold conditions. In the image above, the RSI of 50 (seen in the lower right, in purple) shows that Apple stock was not overbought or oversold, or even nearing one of those thresholds at the time.
You’ll also notice an RSI of 57 (seen in the lower right, in black). This was the RSI on December 1, 2021, at 12:40 (where the mouse was hovering on the chart). With most interactive stock charts, you’ll be able to hover your mouse over specific points in time to see what the values were. In this example, the RSI was at 57 right before profit-taking set in.
Support and Resistance Levels
Support and resistance are terms that refer to key technical levels at which a stock is either likely to change directions or break through to make a big run for the top or bottom.
Support is the point at which a stock moving downward is likely to bounce back up; it’s perceived as the lowest realistic price level the stock should fall to. You can think of support as an imaginary floor.
Resistance is where a stock on a bullish run is likely to reverse course and start to fall, or the highest realistic price a stock is likely to achieve. You can think of resistance as an imaginary ceiling.
However, these resistance and support levels aren’t etched in stone. Technical traders will often look for a stock that’s likely to break out in one direction or another, crossing these barriers. When breakouts happen, the price of the stock is likely to go on a high momentum move in one direction or another.
For example, take a look at the chart below.
In the chart above, the red line connecting Apple stock’s high points is resistance, and the red line connecting its low points is support. For some time, Apple stock traded well within the confines of its support and resistance.
However, toward the end of the trend, the stock fell to support, bounced up, and then experienced a bearish breakout — a break downward through the support line. When the breakout happened, the stock went on a dramatic run lower until it found a new support level just below $160.
How to Read a Stock Chart
Once you understand the components of a stock chart, reading one is a breeze. Start by taking a look at the chart below, which shows a one-month view of Amarin Corporation (AMRN).
At first glance, you can see that Amarin trades with a market cap of $1.413 billion, putting it in the mid-cap range. The stock is also trading near its 52-week low after a long-term downtrend, suggesting that support is strong ahead, and a bounceback may be in the cards soon.
Once you expand the chart and add in the RSI, 50-day moving average, and support and resistance trend lines, it looks like this:
The chart shows that Amarin recently bounced off support and had a bullish cross over the 50-day moving average (in purple). This, combined with the fact that the stock trades far from the resistance line, suggests that the stock has lots of room for more upward movement in the short term. Moreover, the RSI of 64 suggests that the stock is nowhere near overbought or oversold conditions.
As a result, while buying the stock would be a bet against the long-term downward trend, there’s a strong possibility that doing so would result in meaningful returns, at least in the short term. To get an idea of the long-term potential of the stock, more fundamental data is needed.
When making investment decisions, it’s important to pay close attention to the performance of the stock and both technical and fundamental details that are available through the stock chart.
While it may seem cumbersome at first, once you get the hang of it, you’ll find reading stock charts to be quite simple and will be able to absorb most of the data at a glance. Paying attention to this data is a crucial piece of the research that should be done before making your investments.