Stock Market Charting Basics

By Stock Research Pro • March 23rd, 2011

A stock market chart or “stock chart” provides a visual presentation regarding the price trends of a particular stock or group of stocks. Reading and interpreting stock charts falls under the technical analysis approach to stock investing and is used to predict future stock prices based on historical prices and trading volumes. While stock market charting is not seen as a completely accurate way to predict future prices, technical investors believe the practice helps uncover opportunities for profitable trades.

Stock Chart Construction

The basic construction of a stock market chart is the plotting of prices over a specified time period. The vertical axis of the chart represents the price while the horizontal axis shows time. When reading the chart from left to right, you are viewing the oldest data to the most recent. While the format is really very simple, there can be a wealth of information available to stock traders as they observe how high and low a stock has traded and its overall price direction.

What to Look for in Stock Charts

While it can take a while to learn to read stock charts in such a way that you can use the information you’re seeing to make profitable trades, some of the basic things to look for in stock market charting include:

  • The direction of the trend- The price trend is one of the most important pieces of information you’ll collect in charting. The trend can be up, down, or not trending. Many traders operate under an approach known as “the trend is your friend”. These traders will only buy stocks that are trending up and sell stocks that are trending down.
  • Moving averages and crossovers- The 20 and 50 day moving price averages are often used in technical analysis to confirm the direction of a trend and as trading signals. In general, if a stocks 20 day moving average is above its 50 day moving average, the stock is trending upward. The reverse is true if the 20 day moving average crosses below the 50 day moving average.
  • More about moving averages

  • Support and resistance levels- The support level is the area where the price has not fallen below. In determining the support level, you might find that the price has dropped to this point multiple times, only to bounce back up. The opposite is true for the resistance level as it is that price area the stock has struggled to rise above. Identifying support and resistance levels can help you determine when to buy or sell a stock. The approach would be to buy as the stock drops down toward its support level and to sell as it approaches resistance.
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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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