Learning how to read stock charts is crucial if you plan on investing. However, they can seem a little daunting to understand at first. So, how do you make sense of a stock chart, and what should you be looking for? Let’s break it down.
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Why stock charts matter
Put simply, stock charts reveal trends. They help us understand how much a stock’s trading price has changed over a set period of time.
So, if the stock’s increasing in value over time, we’ll see an upward trend on a stock chart. On the other hand, if it’s shrinking, the chart will show a downward line.
So, why do stock charts matter? Well, it all comes down to the big picture. While it’s easy to get caught up in short-term dips and spikes in a stock’s performance, stock charts give you more context. They help you build a more objective understanding of what’s really going on with a stock.
How to read stock charts
Now we’re clear on what a stock chart is, here’s an overview of how to read stock charts and make sense of the data.
1. Ticker
This is the set of letters, or abbreviation, assigned to a company on a stock exchange. Check this carefully to confirm you are investing in the right company.
Examples include AMZN, for Amazon, and NWG, for NatWest Group.
2. Exchange
Next, check which exchange the stock is listed on. Amazon, for example, is listed on NASDAQ, and you’ll find the NatWest Group on the London Stock Exchange.
You’ll find both the ticker and the exchange at the top of the chart.
3. Trends
Understanding the trend line (or bounding line, as it’s sometimes called) is a crucial part of learning how to read stock charts.
The trend line shows you whether the stock price is rising or falling over a period of time (e.g. a day, a month, or a few years). It’s often fairly obvious when you look at a stock chart whether there’s an upward or downwards trend, but sometimes, you might want to dig a little deeper.
- It’s a high-level indicator of general patterns in a stock’s trading value.
- If you identify sharp changes in a stock’s price, you can do your own research to find out what happened before you decide whether to invest or not.
Trend lines matter, but they shouldn’t be relied upon exclusively.
4. Support and resistance lines
Think of support and resistance lines as the average highs and lows for any given stock.
- Support: the stock price rarely drops below this level. When the price drops close to this level, investors may anticipate an upward ‘bounce’ again soon.
- Resistance: this is the level that a stock rarely trades above. When the price gets near the usual ‘resistance’ line, it might be a sign it’ll drop down again.
Sometimes, you can use support and resistance lines to predict what’s about to happen to a stock price.
To be clear, though, these aren’t ‘hard’ lines. If something major happens, it could drastically affect the value of a stock.
- If there’s a huge surge in interest and the price smashes through the resistance line, this could be a sign of strength that will increase the ‘ceiling’ going forward.
- On the other hand, if prices fall dramatically, it could mean a lower support line in the long term.
How quickly you react to shifts in support and resistance lines all depends on your overall investment strategy.
5. Volume
Volume refers to the number of shares traded by the company in a set period. Upticks in trading volume can (but don’t always) affect a share price.
Often, we’ll see a spike in trading volume if there’s good or bad news about a company. However, there could be another reason for the spike, so it’s important you do your own research before making any decisions based on trading volume.
With a stock chart, you can also track when companies typically pay out dividends, which may be relevant depending on your investing strategy.
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Takeaway
It’s crucial you know how to read stock charts before you start investing.
That said, there’s one thing you should bear in mind: stock charts don’t reveal everything you need to know about a stock. They don’t tell you whether it’s a good idea to buy shares or not, and they’re no substitute for doing your own research into your chosen investments.
In short, you shouldn’t invest solely based on what a chart tells you.
And finally, remember this: when it comes to investing, there’s always risk involved. Even if a chart looks good, there’s still a chance you’ll lose money on your investments. So, never invest more than you can afford to lose!
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