Reading stock charts for dummies

Reading stock charts for dummies DEFAULT

Warning: I’m nerding out today … on how to read stock charts. Scoff all you want, but charts are critical to trading smart.

One of my all-time favorite books is “Reminiscences of a Stock Operator,” by Edwin Lefèvre (1923). It’s a biographical novel based on the life of legendary trader Jesse Livermore.

The main character in the book, Larry Livingston, goes through ups and downs as he learns to trade. He gains and loses fortunes more than once.

On the subject of reading stock charts, Livingston says this…

“… a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke.” (Emphasis mine.)


Reading stock charts is fundamental to trading penny stocks. When I started trading I put stock charts up on my wall. I studied them and learned to understand what they meant.

I learned to love charts and hope you will, too.

In today’s post, I’ll explain chart-reading basics. I’ll show you the information charts can provide and why you should study charts from the past.

I’ll also give you patterns to look for and links to read more about specific patterns. Finally, I’ll provide links to sites where you can study charts. For a deeper understanding of charts, I suggest you apply for the Trading Challenge.

Let’s get straight to it…

Table of Contents

What Is a Stock Chart?

At its most basic level, a stock chart is a visual representation of price and trading volume over time. Think back to your junior high math class when you plotted points on a graph. You had the x-axis and the y-axis…

On a stock chart, the x-axis represents time and runs left to right. The y-axis runs vertically and represents price and volume.

You should know how to read a stock table and visualize the basic chart. For the more complicated stuff, there are technical indicators.

Some examples include moving averages, Fibonacci retracements, and the Ichimoku cloud. There are dozens of others. I’ll include the moving average and relative strength index later in this post.

Why Use Stock Charts?

I suppose you could ask a drummer why use drumsticks, right?

A price and volume stock chart is the most basic technical analysis of a stock. If you want to trade, you need to study charts. That means you need to be able to read a stock chart.

Basic Reasons for Using Stock Charts

  • Understand the stock’s price and volume history. I consider myself a glorified history teacher. Much of the information you need to trade stocks the way I teach is on the chart. Studying historical charts can give you insight into possible future price action.
  • Learn to recognize patterns. Patterns are a cornerstone of the strategies I teach in the Trading Challenge.

How to Read Stock Charts for Beginners

Tim Sykes pointing at you.

This is your “how to read stock charts for dummies” primer.

Price & Volume

Again, the y-axis on a stock chart represents price and volume. Price is typically shown as a line graph, a bar graph, or with candlesticks. Some charting software allows histogram and area graphing as well. On nearly all stock charts, volume is represented as a bar graph below the price graph.

Let’s look at some examples. I’ll explain my preferred style later in this post. I’ll also give you some links to StocksToTrade.

Here’s an example of a stock chart. Outlook Therapeutics Inc (NASDAQ: OTLK) had a nice spike on May 17, 2019. Check it out…

how to read stocks charts otlk

Again, the x-axis (left to right) represents time. The time period depends on your setting. For example, you can look at an intraday chart from the moment the market opens until it closes. Or you look at a one-year chart to see longer-term trends in price and volume.

The chart above is one day, including premarket and after-hours trading. The far right of the chart is pre-market on the next day (in this example, May 20.) Each candle on the chart represents five minutes. All charting software allows you to change the time frame of candles. The same is true of open-high-low-close (OHLC) bars or line graphs.

Chart Types and Styles

All charting software and apps allow you to choose from several time periods. Use hours, a single day, multiple days, weeks, months, or years.

Common chart types include line graphs and Heikin-Ashi candles. My favorite — and the style I use — is the candlestick chart.

To get an idea of the different chart styles, let’s look at KBLB again. Each chart below is over 10 days with a 15-minute period. Aside from changing the chart style — and the background on the line chart — this is the exact same chart.

These are all KBLB charts, broken down by Heikin-Ashi, line, bar, and candlesticks…

 

how to read stocks charts kblb line graph

 

how to read stocks ohlc bar

 

how to read stocks charts kraig 10 day 15 minute candlestick

The chart style you use depends on how you trade and what you want to see. The information in each chart is based on the same data. But the output gives slightly different clues about possible future price action.

Each chart style has advantages and disadvantages. For example, the Heikin-Ashi candle gives a clear picture of reversals and trends. That’s because it uses a two-period averaging formula. But the averaging formula obscures certain price action — which can be a disadvantage.

I use the standard candlestick chart when I trade, and it’s what I recommend for students. First, learn your strategy and how to identify patterns. Then you can start playing with other chart styles.

Moving Average Lines

Moving average (MA) lines are a graphical representation of past price history. A 200-day simple moving average (SMA) plots a line of the average closing price for the past 200 days. The period you choose for the chart determines the period used for the moving average lines.

For more on moving averages, check out this post. It explains in much greater detail the different types of moving averages. It gives you the formula to calculate moving averages and use them as a gauge of support and resistance.

I don’t use technical indicators much when I trade. But the post I link to above shows you some moving average chart setups you can use for trading. For example, some traders use two moving averages — a slow and a fast. They watch for the lines to cross and this signals them to buy or sell.

Relative Strength Line

The relative strength index (RSI) measures losses against gains. Traders use it to determine whether a stock is overbought or oversold. Like with moving averages, most stock charting software allows you to plot an RSI line. It’s usually displayed in a separate graph below the volume bars.

For more on relative strength, read this post. It shows you how to calculate the RSI and use it to determine overbought or oversold conditions. It also explains how some traders use RSI to determine entry and exit points.

A Note About Technical Indicators

There are literally dozens of technical indicators available to you for stock analysis. Some traders love to use them. I prefer to use basic support and resistance and follow recognizable patterns.

It’s important for you to get familiar with different technical indicators. But don’t miss the proverbial forest for the trees. If you find an indicator useful or interesting, by all means — learn how to use it when you trade…

But beware of analysis paralysis! Sometimes technical indicators are in direct conflict with each other.

How to Read Stock Charts — Infographic

I know this technical stuff can make your eyes glaze over. So let’s roll it back a little bit.

This slick infographic breaks it down to basics. It clearly shows a chart’s support and resistance. When you’re able to read charts, you’ll have a better chance of figuring out what happens next.

how to read stock charts

Resources for Stock Charts

I teach my students to recognize the patterns I’ve traded successfully over the years. My favorite patterns change from time to time. I have students trading most, if not all, of the patterns I teach.

I’ve written several posts about patterns. Here’s what you should do to become familiar with patterns. First, check out the following posts on the blog:

Those posts have a ton of information about support, resistance, breakouts, and more. Once you read and re-read them, apply for the Trading Challenge. Get ready to work hard … and have an incredible ride finding your market stride.

Get the Right Equipment

There are lots of stock screening and charting options out there. But my favorite, by a landslide, is StocksToTrade. Designed by traders for traders, it has everything I need, all in one place. I even helped design it and I’m an investor.

I think its charts are incredible. You can choose time constraints between one minute and month to month … This lets you view price action over any time frame. The charts come with lots of economic indicators, and you can view multiple charts simultaneously.

You can also use StocksToTrade to create watchlists, scan news, and monitor tickers. It’s all accessible from your dashboard.

You can take it for a test drive with a 14-day trial for just $7. That’s less than the cost of a fast-food meal to try it for two weeks. I highly recommend you check it out.

How to Read Stock Charts for Day Trading

I made my money day trading. I trade mostly penny stocks, and day trading is all I trust most of them for. Even just overnight, holding shares of junk stocks makes me nervous.

Charts are critical for my day trading strategy. Patterns like breakouts can take place over a long period of time and tell you something about trading right now. This is why you study history.

And if you’re shorting first red days and going long on first green days, certain charts DEFINITELY matter.

Check out my post on dip buying morning panics. Pay attention to these. Even if the chart looks fugly on the way up, the panics are usually predictable. When the setup is right, they’re a thing of beauty.

Frequently Asked Questions About Reading Stock Charts

Like I said, this post only covers the basics. But while we’re at it, let’s get those burning questions out of the way.

How Can You Read Stock Charts on Robinhood?

The better question is how to read stock charts — period. Focus on your education before jumping right into trading. And do your research to find the broker that best fits your needs. I’d be leery of any broker that gamifies trading...

How Do You Read the Stock Market Index?

There are charts for indexes too. While the S&P 500 won’t tell ya much about penny stocks, it’s still helpful to see the general market trends. This can tell you a lot about which sectors to watch and the volatility in the market.

How Do You Read Charts on Stock Apps?

I don’t recommend using apps for planning trades … And I think the best tool for charts is StocksToTrade because I helped design it for the volatile low-priced stocks I love to trade!

How Do You Read Stock Volume Charts?

Unlike price, volume is pretty uniform in charts. It’s almost always shown as a histogram. This is the bar graph that’s just under the price graph. Check the markings on the borders for what the lines signify.

Apply for the Trading Challenge

I’ve mentioned the Trading Challenge a few times in this post. If you’re getting serious about trading, you should apply today.

The majority of traders fail. Why? I think it’s a matter of lack of preparation. That’s where I want to help you.

The Challenge is where my top students built their knowledge. You can take advantage of the same things they did — often right alongside them. You can access live webinars, the Challenge chat room, and so much more. So it’s up to you to set a learning schedule that fits your life and get to work.

Reading stock charts is only the beginning. Keep in mind, I’m not looking for more students just to have more students. I’m looking for students who are willing to put in the time and effort. If that’s not you, don’t bother.

If it is you … get on it. Don’t put off until tomorrow what you can do today. Start your application process here.

Conclusion: How to Read Stock Charts

When I got into penny stocks, I spent a few weeks simply watching stocks trade. It was fascinating to discover there were certain patterns. Not only were they recognizable to me, but during the dot-com bubble, I found them to be predictable.

Now, more than 20 years later, I still see many of the same patterns. As sectors come into play, so the patterns appear. When a sector goes out of favor, the patterns play out less often.

This is the most important piece of the puzzle, but it’s only one piece of the puzzle. If you’re new to this, check out my FREE penny stock guide next.

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And if you want to get up to speed quickly, I’ve designed a 30-Day Bootcamp for just that purpose.

Trading is like learning a language. Take your time, learn your ABCs … and maybe one day you’ll be writing Shakespeare. Or at least some good knock-knock jokes.

What kind of charts do you use and why? What did you learn in this post that you can use right away? Leave a comment! I love to hear from all my readers.

Sours: https://www.timothysykes.com/blog/how-to-read-stock-charts/

How to Read Stocks: Charts, Basics and What to Look For

If you're just getting into investing, there are a few things you should understand at the outset. 

While picking a brokerage and a of couple stocks to get started are key on your investment journey, understanding how to actually read a stock or stock chart is just as vital. 

But, how do you read stocks? And what are some easy takeaways that can make investing more simple and less confusing? 

How to Read Stocks

Reading stock charts, or stock quotes, is a crucial skill in being able to understand how a stock is performing, what is happening in the broader market and how that stock is projected to perform. Knowing the basics can help investors make better decisions and are a vital first step in getting into and understanding investing.

Stocks have quote pages or charts, which give both basic and more detailed information about the stock, its performance and the company on the whole. So, what makes up a stock chart? 

What Is a Stock Chart?

A stock chart or table is a set of information on a particular company's stock that generally shows information about price changes, current trading price, historical highs and lows, dividends, trading volume and other company financial information. 

52-Week High and Low

The 52-week high and low are key metrics when looking at the trajectory of a stock in a given period (in this case, one year). The 52-week high and low show the highest and lowest prices at which the stock traded in that time period, although they don't often show the previous day's trading price.

Ticker Symbol

The ticker symbol is the symbol that is used on the stock exchange to delineate a given stock. For example, Apple's ticker is (AAPL) - Get Apple Inc. (AAPL) Report on Nasdaq, while Snapchat's ticker is (SNAP) - Get Snap, Inc. Class A Report on the New York Stock Exchange (NYSE). The ticker is usually found under a column titled "ticker," or, in some cases, right next to the name of the stock in parentheses. 

However, while some tickers look a lot like the company name - like Microsoft and MSFT -  (MSFT) - Get Microsoft Corporation (MSFT) Report , not all companies' tickers do, so be sure to make sure you are looking up the right company when searching for tickers. 

Dividend per Share

Not all companies pay out dividends - which are essentially small payouts of company profits to shareholders. But for the ones that do, the dividend per share - or the annual dividend payment per share for investors - will be represented on the stock chart. 

Dividend Yield

The dividend yield, then, is the percentage return on that dividend, and is calculated by dividing the annual dividend by the current stock price. 

P/E Ratio

The P/E ratio, or price-to-earnings ratio, is a key metric when looking at a stock chart. The P/E ratio is found by dividing the current stock price by the earnings per share for the past year (four quarters). 

Day High and Low 

The day high and low simply show the highest and lowest prices at which the stock traded throughout the day, from market open to market close. However, the day high and low may not be the open and close prices - those are separate figures. 

Open Price

The open price is simply the price at which the stock opened trading on any given day. 

Close Price

The close price is perhaps more significant than the open price for most stocks. The close is the price at which the stock stopped trading during normal trading hours (after-hours trading can impact the stock price as well). If a stock closes above the previous close, it is considered an upward movement for the stock (and will impact things like candlestick charts, which we'll get to later). Vice versa, if a stock's close price is below the previous day's close, the stock is showing a downward movement.  

Prev. Close

The prev. close, or previous close, is the price at which the stock closed the previous day (24 hours before). 

Net Change

If a stock is "up for the day" or "down for the day," it has to do with the net change. The net change in a stock is a dollar value change from the previous close price of the day before. A positive net change will have the stock "up," while a negative one will have the stock be considered "down" for that day. 

How to Read a Stock Chart

A stock chart is a little different than the basic information on a stock - stock charts include charting, or plot lines, which represent the price movements of the given stock. While you can customize how the chart is drawn (once you get more advanced), price lines are generally represented in a line or mountain chart form. The thin line represents the price movements over a given period, generally six months or one year. If you are working with an interactive chart, you can set the chart to different time frames, from five years back to one day. 

However, when actually reading and interpreting a stock chart, there are a few things you should do to start. 

1. Observe the Price and Time Axes

Every stock chart has two axes - the price axis and the time axis. The horizontal (or bottom) axis shows the time period selected for the stock chart. This can generally be customized to show anything from a year time period (or even multiple years) to a day. 

The vertical (or side) axis shows the price of the stock. These two axes help plot the trend lines that represent the stock's price over time, and are the framework for the whole stock chart. 

2. Look for the Trend Line

This should be pretty obvious, but a good bit of the information you can glean from a stock chart can be found in the trend line. 

Depending on the type of chart you're looking at, you can choose different chart styles including the traditional line, mountain, bar, candlestick and other chart styles.

Line charts simply track the price movements of a stock using the last price of that stock.

Bar charts take the highest and lowest prices of the day plus the closing price of a stock to chart its trend.

Candlestick charts look a bit more complex, but typically use clear or green boxes to indicate periods when the price of the stock closed higher (bullish) and red or pink boxes when the stock closed lower (bearish) than the previous day. The candlestick chart uses the stock's open, high, low and close prices to chart trends. For candlestick charts, the open and close prices are the most important when determining if there was upward or downward momentum for the stock. 

Watch this short video to learn more about reading these types of charts.

In general, a simple line chart will be able to give you basic information about the trend of a stock. But it's not the only important metric to look at. 

3. Identify Trading Volume

In addition to just the trend of the stock's prices, the stock's trading volume is another key factor to look at when reading a stock chart.

The volume is generally indicated on the bottom of the stock chart in green and red bars (or sometimes blue or purple bars). The key thing to look out for when examining trading volume is spikes in trading volume, which can indicate the strength of a trend - whether it is high trading volume down or up. If a stock's price drops and the trading volume is high, it might mean that there is strength to the downward trend on the stock as opposed to a momentary blip (and vice versa if the price moves up). 

4. Identify Lines of Support and Resistance 

Still, another important aspect to examine on a stock chart are lines of support and resistance. Whenever a stock trades up or down, it generally falls within what are called support and resistance lines. Essentially, the support line is a certain price that the stock generally doesn't drop beneath - it "supports" the stock upward and keeps it from trading below that price given market signals. Conversely, the resistance line is a certain price that the stock typically doesn't trade above - it "resists" the stock pushing through that top price. 

Stock prices generally bounce between these support and resistance lines, but if the stock pushes through the resistance line, that previous resistance line becomes the stock's new support line, and the stock may go higher from there. However, the opposite is true if a stock dips below the support line. 

Tracking support and resistance lines is important in predicting or understanding the overall trend of a stock, and when it might go down or up. 

There are plenty of other slightly more complicated ways and metrics to look at when reading a stock chart, so it is important to educate yourself on technical analysis to get the most of the stock's information when investing. 

But, what else can you glean from a stock chart in general? 

Stock Chart Information

Stock charts may also have additional information about the company and the stock's historical performance.

Earnings per Share (EPS)

Earnings per share, or EPS, can be found on many stock charts, and is a good indicator of how well the company is doing. EPS measures the amount of net profits a company has earned per share of their stock. For investors, EPS essentially represents the portion of the company's profits that their shares have a stake in. 

A company's EPS is generally among other information on its stock chart, and is updated every quarter after the company reports earnings. 

Market Cap

A company's market capitalization is calculated by multiplying the company's total number of shares outstanding (shares of stock the company has issued to the public) by the current share price of one share of stock. 

Most stock charts include this information. 

1 yr Target Est

While slightly less common on a basic stock chart, the 1 year target estimate is an analyst estimate of what one share of stock will be worth in one year. However, because analysts tend to have different (sometimes drastically) estimates, it is generally not considered a solid metric to use when reading a stock chart. 

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Stock Charts For Dummies

The easy way to get started in stock charts

Many trading and technical analysis books focus on how to use charts to make stock trading decisions, but what about how to actually build a chart? Stock Charts For Dummies reveals the important stories charts tell, and how different parameters can impact what you see on the screen. This book will explain some of the most powerful display settings that help traders understand the information in a chart to find outperformance as its beginning.

Stock Charts for Dummies will teach you how to build a visually appealing chart and add tools based on the type of trading or investing decision you're trying to make. It will also introduce you to the pros, cons, and best practices of using three key types of charts: Candlesticks, Bar Charts, and Line Charts.

  • Build and use technical chart patterns
  • Increase profits and minimize risk
  • Track and identify specific trends within charts

A unique guide for beginning traders and investors, Stock Charts for Dummies will help you make sense of stock charts.

Sours: https://www.oreilly.com/library/view/stock-charts-for/9781119434399/
Understanding Candlestick Charts for Beginners

As a technical analyst with the International Federation of Technical Analysts (IFTA), I am certified in how to read stock charts. So I hope you enjoy this in-depth definitive guide to reading and understanding stock charts, patterns, and indicators.

1. Understand What a Stock Chart Is

What is a Stock Chart?

A stock chart is a visual representation of the current and historical stock prices displayed on an X & Y axis graph. Stock charts allow you to see the past and recent price performance of a company’s shares. Significant to stock charts are volume and price indicators and the ability to see historical price patterns and trends to predict future price movement.

How to Read Stock Charts & Indicators

Understanding Stock Charts

To understand stock charts, you need to know how supply and demand work in a marketplace. That is why the volume indicator and the stock price movement are the critical elements in effectively interpreting stock charts. For example, when the price rises on increased trading volume, you can expect the price to continue higher.

All of this will be covered in the section on volume and supply and demand.

Reading Stock Charts

You can read stock charts using Stock Charting Software that performs the data collection and calculations for you. You need to understand stock prices, timeframes, supply and demand, chart patterns, volumes, and how stock chart indicators are calculated. We cover the eight different stock chart types, indicators & patterns in this guide.

This section is all about understanding a basic stock chart. Known as Technical Analysis or stock chart analysis, chart reading enables us to visualize a stock not through numbers but patterns. It allows us to get to see the stock, see its history, learn its personality and make a value judgment on its future. Before you get started learning to read charts, you might want to select charting software that is perfect for beginners.

We will start with a basic price chart and move on to technical indicators and assess their importance and meaning in future sessions.

2. Review the Process of Reading a Stock Chart

Here is a simple process to reading a stock chart:

  1. Choose the chart type you want to use
  2. Choose the timeframe, days for short-term trading, weeks for long-term investing
  3. Add relevant indicators, e.g., RSI, OBV, MACD
  4. Add the Volume indicator
  5. Draw trendlines linking price highs & price lows
  6. Compare volume and price direction to assess the future direction
How to Read a Stock Chart - 6 Step Process
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3. Choose the Chart Type You Want to Use

Stock charts come in many shapes and sizes.  From the differences in the bars to the different concepts applied to the chart itself.  Here you will find a reference guide to the many types of charts available with an overview of their potential uses.

1. Line Stock Chart

Line Stock Chart

This is one of the most basic charts, probably giving the least amount of information.  The line in the top pane is drawn using the close price for each unit of time.  So if this is a daily line chart, the close price for the day is used.  If this is a 5-minute chart, then the close price for every 5 minutes of trading is used.

The Positives of Line Stock Charts

A straightforward view of the price movement.  Good to use when comparing the performance of many stocks on the same chart.

The Negatives of Line Stock Charts

It does not show the Price Open / High / Low for the trading period.  The day’s trading range is important in price-based decision-making as it indicates bullish or bearish momentum.

Stock Charting Software With Line Charts

  • TradingView – Our Number 1 & Free Stock Charting & Analysis Package
  • Stock Rover – The Best Software for Stock Screening for Investors
  • TC2000 – Best For US Trading & Stock Analysis
  • TrendSpider – Best For Automated Technical Analysis

2. High Low Close Bar Stock Chart (HLC)

High Low Close Bar (HLC) Chart

Using bars is a step up from the line chart as it allows us to plot additional useful data on the chart.  Here we have each bar representing a trading period with the price High, Low, and Close represented.  Refer to the diagram.

The Positives of High Low Close Bar Charts

More information is available, showing the days trading range, meaning did the stock price close near it’s high (bullish) or near it’s low (bearish).

The Negatives of High Low Close Bar Charts

No opening price is reflected in this chart.  The opening price is important as it allows us to immediately see if the price gapped up or down on open and where the closing price is related to the opening price.

Stock Charting Software With HLC Charts

  • TradingView – Our Number 1 & Free Stock Charting & Analysis Package
  • Stock Rover – The Best Software for Stock Screening for Investors
  • TC2000 – Best For US Trading & Stock Analysis
  • TrendSpider – Best For Automated Technical Analysis

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Video: Stock Chart Types Walkthrough

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3. Open High Low Close Bar Stock Chart (OHLC)

The complete bar chart.  The chart of choice for those who like to use bar charts.  Here we see the day’s trading range, including the open price and the close price.

Open High Low Close Chart (OHLC)

The Positives of Open High Low Close Bar Charts

We can see instantly if the trading period closed higher or lower than the open.  We can also see the bar’s length, which shows us the volatility or the strength of the trend.

The Negatives of Open High Low Close Bar Charts

There are few downsides to this chart type, and many investors and traders use it.  Most chart packages also allow you to color the up days green and the down days red.  For those who prefer even more information in the price chart, the following charts can also be used.

Stock Charting Services With OHLC Charts

  • TradingView – Our Number 1 & Free Stock Charting & Analysis Package
  • Stock Rover – The Best Software for Stock Screening for Investors
  • TC2000 – Best For US Trading & Stock Analysis
  • TrendSpider – Best For Automated Technical Analysis

4. Japanese Candlestick Charts (Recommended)

Used widely in Japan and gaining a strong foothold in the rest of the world, the Japanese Candlestick chart gives an excellent insight into current and future price movements. Named Candlesticks because they look like candlesticks with a wick and the main body.

Japanese Candlestick Chart

The Positives of Japanese Candlestick Charts

Gives an excellent view of the Open, High, Low, and close of the price.  Pictorially illuminating and easy to see trends.  There is a full reference below of 1 bar to 4 bar patterns, which help us make judgments on the future direction of price.  They connect psychology with the price pattern.

The Negatives of Japanese Candlestick Charts

Although Candlesticks have many advantages, they can seem like information overload to the beginner.  There are also many Candlestick patterns to learn.

Further Reading on Japanese Candlesticks.

Stock Charting Services With Candlesticks Charts

  • TradingView – Our Number 1 & Free Stock Charting & Analysis Package
  • Stock Rover – The Best Software for Stock Screening for Investors
  • TC2000 – Best For US Trading & Stock Analysis
  • TrendSpider – Best For Automated Technical Analysis

Stock Charts Using Volume

The use of volume in technical analysis is important as volume allows us an insight into the supply and demand situation.  The following charts incorporate volume into the price window to provide additional information.

5. Volume at Price (VAP) Stock Chart

Volume at Price (VAP) Chart

The price at volume chart is an exciting new development, as instead of showing volume for a certain time period, it shows us the volume of trades at a specific price level.

This enables us to see at what price level most market participants believe the stock is fairly priced.

The Positives of the Volume at Price Chart

Innovative and intuitive, this charting method combined with standard volume bars can enable you to see market psychology both in time and price.  It is also easy to see volume increasing as price rises; this is a very bullish sign.

The Negatives of the Volume at Price Chart

Not all stock charting packages offer this type of indicator.

Stock Charting Services With Volume at Price Charts

  • TradingView – Number 1 Free Stock Charting & Analysis Package
  • TC2000 – Best For US Trading & Stock Analysis

6. EquiVolume Stock Charts

EquiVolume Stock Chart

EquiVolume Charts attempt to provide the solution of Volume at Price differently.  Instead of plotting volume in separate bars, it is, in fact, incorporated into the price bars themselves.

The wider the price bar, the more shares were traded during that period.

The Positives of Equivolume Stock Charts

Visually impressive and extremely easy to interpret.

The Negatives of Equivolume Stock Charts

This type of chart can distort the timeline running across the bottom of the chart.  This makes drawing accurate trendlines more challenging.  Few Stock Charting service providers offer EquiVolume.  I would not recommend using EquVolume as a tool.

7. Point and Figure (P&F) Charts

Point & Figure Stock Chart (P&F)

There are a few other types of charts that you probably have never heard of before.  However, they are quite useful, and you would be required to learn them if you wanted to become a Certified Technical Analyst.

Point & Figure Charts are very unusual as they feature no timeline along the bottom horizontal axis.  The Chart is made up only of price swings.  The vertical price bar is arithmetic and shows only units of price.

A “0” is plotted if the price moves down a whole price unit (for example, 50 cents).  When the price changes direction and starts to move upwards, an “X” is marked in each box.  This filters out smaller price moves and enables us to focus on trend quality.

Trendlines are always plotted either horizontally or at 45-degree angles.

The Positives of Point & Figure Stock Charts

An excellent tool for doing price target calculations.  Simple to learn and interpret, few price patterns to learn.

The Negatives of Point & Figure Stock Charts

Learning this type of charting can be easiest when performing the charting by hand.  That means you are marking the “X” and “O” on a piece of paper.  This can also be very time-consuming.  Few services offer Point and Figure Charts. However,  StockCharts.com offers a free Point and Figure Charting Service that is well worth investigating.

Stock Charting Services With Line Charts

  • TradingView – Number 1 Stock Charting & Analysis Package

8. Market Profile Stock Charts

Market Profile Chart - Old School and Cool

Developed in the 1980s by Chicago Board Of Trade Pitt Trader J. Peter Stiedlmayer.  The letters on the chart show time units.   “A” represents the first 30 minutes of trading, “B” represents the second 30 minutes of trading.

The point of control is the area (price range) at which the most trades occur during the day.

The value areas are the price range at which 70% of the action happens.  When the price is above and below the value areas, this represents a possible ideal buying or selling point.

The Positives of Market Profile Stock Charts

People who use market profile charts become evangelists to the cause.  They believe it offers unique insights into buy and sell opportunities.  It can be a good option if you are a quick-fire day trader.

The Negatives of Market Profile Stock Charts

It can require an effort to learn how to use them, and very few stock chart services offer this type of charting.

4. Configure Your Stock Chart

Core Elements of a Stock Chart

  • Ticker & Company Name: What company stock price are you looking at
  • Chart Type: What chart are you using? Bar, Line, Candlestick
  • Time Frames: Daily, Weekly, Monthly, or Yearly
  • Chart Scaling: What scale is price using, Percent, Fixed, Algorithmic or Logarithmic
  • Price Bars: Indicate the Open, High, Low, and Close of the price for the day

This is a historical price chart of Intel Corp. (Ticker: INTC). Once you understand what each of these arrows means, you are ready to step forward into the technical indicators section.

Understanding a Stock Price Chart – Open, High, Low, Close, TimeFrame, Ticker & Scaling

Detailed Stock Chart with Description of all elements - Click to Zoom

This chart is in the format of a Daily “Open High Low Close” OLHC bar chart, mapped to the Logarithmic Scale.

Ticker & Company Name

The ticker (INTC) is the unique abbreviated stock reference code; all stocks have a unique Ticker to be easily found and referenced.

Chart Type

There are many different types of charts available to use; this one is an OLHC Chart, which means “Open, High, Low, Close.”  OHLC refers to the bar itself. The opening price is the left-sided dash, High is the top of the vertical line, Low is the bottom of the line, and Close is the right-sided horizontal dash.  Read more about stock prices.

Time Frames

Time-frames are always plotted along the chart’s bottom and can be anything from 1 minute per bar (intraday) to 1 year per bar. This chart shows a Daily chart, which means each bar equals 1 day.

Chart Scaling

Chart Scaling is critical; most professional chart readers use the “Logarithmic Scale,” meaning each unit along the right-sided Y-Axis is the same percentage apart; this makes it very easy for you to see on the price chart what percentage a stock moves on any given day in history.

Arithmetic Scale Example Chart

If the bottom right-hand side of the chart shows a 2.20%, this is the % between each of the horizontal Plotlines.

Arithmetic Scale.

The other key scale is the “Arithmetic Scale,” which shows a fixed price in the Vertical Y-Axis; in this example, the scale increments every 50 cents, $12.50, $13.00, etc.

 

5. Learn the 3 Types of Stock Price Trends

Knowing How to Draw a Stock Chart Trendline is Critical To Your Success in Stock Trading.

What is a Stock Price Trend?

If someone asked you today, “Is the stock market in an uptrend, downtrend, or a lateral consolidation,” what would you answer?

Knowing the answer to this key question is important for the stock market or even an individual stock.  Why?

If you buy a stock (go long) in an uptrend, you are more likely to make money on it.  There is a simple way to see for yourself if the market is heading upwards or downwards.

First, let’s examine what types of trends exist:

3 Types of stock price trends:

  • Uptrend: The stock or index is moving up, making new highs or higher highs
  • Downtrend: The stock or index is moving downwards, making lower lows
  • Sideways consolidation: neither making significant new highs or new lows

There are also time-frames to consider in evaluating a trend; for this, we will refer to Charles Dow’s classification in Dow Theory.

Types of Stock Trend Time-Frames:

  • Short Term: Days to weeks
  • Medium Term: Weeks to months
  • Long Term: Months to years

By combining the above terms, you could be specific about the market trend.  For example, you could say the market is in a short-term up-trend but a long-term down-trend.  But isn’t that contradictory, the market being in both an uptrend and a downtrend at the same time?

Not really it makes perfect sense.

The Following Examples are an excerpt from the Liberated Stock Trader Academy Book and Training Course.  Chapter 7, Section 2.

6. Draw Trendlines on the Stock Price

Drawing trendlines is one of the most important skills of technical analysts; trendlines represent important areas of support and resistance.  Once you have this skill, charts come to life and start to signal their message to you.

3 Steps to Drawing your First Trend-lines

Soho Primary Uptrend 2009

1. Drawing Uptrends

  1. To evaluate an upward trend, draw a line joining the highest highs
  2. For the floor of the uptrend, draw a line connecting the lowest lows. The price here bounces 3 times off the bottom line but then proceeds higher.
  3. A trendline is drawn to show that price has moved strongly past the previous high this is a BUY Signal at $35.50.
  4. Finally, the price is exhausted and falls through the bottom resistance line at $51.  This break of the upward support line is a sell signal.

Quick Tip: The more bounces off a trendline the stronger the trend.

Buying and selling based on the trendlines are shown here would have bagged you a 49% win.  Alas, life is never that easy, and showing this in retrospect does mean we benefit from hindsight.

2. Drawing Support & Resistance Trendlines

You must practice drawing trendlines as much as possible; after a while, you will get used to it, and it will become second nature.

Here is another example of how to draw trendlines.  This is a chart of Ticker: AAPL Apple Inc. it shows how to draw trendlines in a downward price move and an upward price move.

how to draw trend lines

 

Notice that the trendline above the price is called resistance, and the trendline below the price is called support.  When price breaks up through resistance, it moves higher; this could potentially be a buy signal.  When the price breaks down through the support trendline, it moves lower; this could potentially be a sell signal.

Quick Tip: The longer the trendline is in place or acts as support or resistance, the stronger the trend and the bigger the move when the trendline is broken.

Look again at the chart of Apple Inc.  See how Apple was in a sideways consolidation from 2001 through to 2004. When it eventually broke out of that channel upwards through resistance, the stock took off, making over 1600% gain.

Chapter 7 of the PRO Training delves deeper into the technical analysis to enable you to make Buy and Sell decisions using trendlines, spot the most important patterns and trends, discusses the importance of Price Gaps, Triangles, and Wedges.

7. Use Trendlines to Determine Price Patterns

Drawing Trendlines to Recognise Stock Chart Patterns

If you cannot draw a Trend-line you should not invest in the stock market!

This example will examine how to look at price movement and use it to evaluate the stock.  

Price is known as the most important indicator, and so it should be when it boils down to it, the most important thing is the price.

Here we can see a Broadcom (BRCM) chart, one of the darlings of the tech bubble in 2000.

Where will you draw the trendlines?

Take a look at this Stock Chart, where would you draw the Trend Lines?

Take a moment to think about where you would draw the trendlines before scrolling down to the chart where I have drawn them.

Support & Resistance and a Double Bottom Pattern Trendlines

A chart can really come alive when we add trendlines. The graphic below shows BRCM, with trendlines superimposed.


Follow This Process to Draw the Trendlines

  1. From left to right, we see from mid-April to July that the stock starts to move in a sideways pattern known as “Channeling.”
  2. The two red lines show the “trading range”; this is the range between which the stock price fluctuates.
  3. The upper line is known as the Ceiling or the “Line Of Resistance,” and the lower the Floor or “Support.” Both lines show where the number of sellers equals that of buyers.
  4. When the stock price falls through the support line, it means the trend has changed, and new market impetus has affected the stock. If you owned this stock in April and enjoyed the corresponding price rise, this break would be a strong “Sell Signal” to the trained eye.
  5. The stock consequently dropped in 2 days and had the good courtesy to rise again over the following month to give anyone slow on the uptake another chance to Sell. It broke through the previous support line but was not strong enough to make it to the channel’s upper ceiling. If you had not got out this time, you would have suffered a punishing 50% loss. Enough to make a grown man weep!
  6. The next significant point to note is in mid-October when the stock bounces at about $13, clearly oversold, and proceeds to make a very nice looking “Double Bottom” or “W” bottom.
  7. Chartists the world over recognize the double bottom, and those that like to buy on Bottoms would have done. This clearly happened as the stock moved up 38% in 3 weeks.

8. Learn To Recognize These Price Patterns

The first example in this module will show you the head and shoulders pattern.  We will then discuss the other patterns that exist.

Head and Shoulders Pattern

What does a Head and Shoulder Pattern look like?  The importance of the head and shoulders pattern should not be under-estimated; it is one of the most reliable patterns in technical analysis yet one of the most misunderstood.

Here we discuss the famous head and shoulders price pattern. Understood to be one of the most predictive patterns, the Head and Shoulders pattern has some unique characteristics.

However, you do need to know what you are looking for.

A Head & Shoulders Pattern has the following traits.

  • Two shoulders.
  • A high point, the head, in between the shoulders.
  • The volume should confirm the pattern.

So what lessons can we learn from the chart?

  1. This is the left shoulder.
  2. This is the head
  3. This is the right shoulder.
  4. This is the neckline, using a trend-line connect the low from both sides of the head through the outer price limes.
  5. The left shoulder was formed on increasing volume. This is to be expected.
  6. In the forming of the head, we see a significant decrease in volume.
  7. In the right shoulder, we also see the decreasing volume.
  8. The price failed to exceed the previous peak.

All of the above conditions of the Head & Shoulders pattern here are consistent with textbook descriptions. See the classic book Technical Analysis of the Financial Markets by John J Murphy as a reference.

The Head and Shoulders pattern is said to be confirmed on a break of the neckline; this is about to occur/has occurred in the final price bar in July.

Megaphone Chart Pattern

Here we have a Megaphone Top.  This is a rare pattern that usually occurs at major tops.  You can see that the swings get larger at each bounce, suggesting uncertainty and volatility until, finally, the price breaks out downward on increased volume.

Wedge Chart Pattern

Wedges have a very different character from triangles because they point in the exact opposite direction to the breakout.  Both of the edges of the wedge point in the same direction, either upward or downwards.  In the image below, we can see that the falling wedges signify an upward breakout.

The rising wedge signals a downward breakout.

Stock Chart Pattern Accuracy

The following diagram shows us the most common reversal patterns and their relative probability of accuracy.

Stock Chart Pattern Accuracy - Graph

Price patterns and trendlines share the same characteristics.  The longer they are, the more important they are.  The more a price pattern touches a trendline and reverses, the more important that line is.  In this diagram, we see that a Triple Top’s accuracy is more than that of a Single Top.  Why? Because price touches the resistance level more times.

Gaps in Stock Chart Patterns

Another significant pattern that signals continuation is the “gap.”  A gap occurs when a stock’s price during a given period is significantly higher or lower than the price range of that stock for the previous period.  The price did not overlap at all over the two periods. This leaves what is known as a “gap” in the price chart.  A “gap up” in the stock price is a show of strength. This tells us that the demand for the stock was so strong on the open that it jumped many points higher.  The opposite is true for a “gap down.” This signifies weakness as the stock gaps down usually due to aggressive selling.

The Breakaway Gap

The Breakaway Gap usually occurs when a stock moves normally through a price range or channel, then the demand for the stock explodes, and the stock “gaps out” of the current trend.  This is a sign of strength and a very bullish sign with a “gap up.”  A breakaway gap to the downside is a sure sign of weakness.

The Continuation Gap

The Continuation Gap is another sign of strength, showing that demand is still strong and the trend will continue; this often confirms the initial “breakaway gap.”

The Exhaustion Gap

The Exhaustion Gap can be the second or third gap and occurs during a powerful upsurge in price.  This is a warning, as it might signify that the stock has overextended itself and may be due to a change in trend or a pullback.  The opposite is true for an exhaustion gap on the downside, which might signal a bottom is near.

The Island Gap

The Island Gap occurs when demand is so high that price and the market participants drive the price up to unacceptable levels, and the demand dries up rapidly.  This sudden oversupply causes the stock to plummet as all demand is satiated.  Of course, too much supply with no demand causes falling prices.

Quick Tip: Gaps are important signs of serious shifts in supply and demand.  If surges in demand outstrip the supply, prices rise to convince people on the sidelines to sell.  Downside gaps indicate supply is outstripping demand, causing prices to fall.

This might seem all very theoretical, so here are gaps patterns in action.

Examples of Stock Chart Gaps

Here we can see clearly how gaps can occur in stocks.  STEC provides a perfect example of how understanding gaps is critical to trading success.

Stock Chart Continuation Patterns

Continuation patterns occur during a price move and are visual representations of consolidation or periods of rest before the price continues its trend, be that upwards or downwards.

5 Types of Stock Chart Continuation Patterns

Image courtesy of Liberated Stock Trader PRO Training. All rights reserved

Continuation Patterns Diagram

All of these triangles are essentially continuation patterns. They should give you some confidence that the trend will continue.  Always be aware that if the price breaks out in the wrong direction due to a shock (e.g., bad earnings or bad news), you should be prepared to act.

A widespread continuation pattern is the Rectangle, or more commonly known as a” “channel” or “trading range.”  The price should normally break out in the same direction as the previous trend.

8. Add Stock Chart Indicators

Indicators are lines that get plotted on a stock chart to make it simpler to understand the history and perhaps the future direction of a stock.  Stock chart indicators consist of 2 key data points, price and volume. However, it is also possible to map fundamental financial data such as EPS or PE ratio onto a chart.

Indicators may seem like something only Einstein himself can master. Still, here everything is within reach; you will have a solid understanding of a fundamental concept in just a few minutes.

Chart Indicators: Moving Averages

What are Moving Averages?

Moving averages are the staple diet of any chart reader and enable you to visualize changes in price trends.  Moving Averages or “MA” are a simple mathematical calculation that takes the average price (mean) for a given period and plots this on a chart.

Moving Average Calculation Sheet

So the average price for the first 5 days = 3.8.

The key here is when we use 2 or 3 moving averages together, we see visually when the lines cross a stock’s trend is changing, and it may be time to look seriously at buying or selling a given stock.

Using 3 Moving Averages Together

Below you can see a standard chart with 3 moving averages plotted.
MA50 (RED) – this is the moving average of the last 50 periods (in this case, days – it is a daily chart)
MA20 (Yellow) – this is the Moving Average of the last 20 days
MA10 (Orange) – this is the Moving Average of the last 10 days

The secret is the combination of the indicators.

What do you see here? Take a long look!

  • Where do the lines cross?
  • What happens to the stock price after the lines cross?
  • What happens to the overall trend when the lines cross?
3 Line Moving Average Chart

How to use Moving Averages to signal BUY and SELL opportunities?

Here we are using 3 Moving averages; you could use 2; however, 2 is the minimum. You can set different moving average timeframes; common ones are :
10:20:50:200 day MA’s

If you are trading more short-term, use the lower Moving Averages. If you buy and hold a stock for 6 months or more, use longer averages.

3 Line Moving Average Chart - 4 Point Analysis

As you can see, when the MA’s cross, this is the pivotal point that signals a change in trend.

Of course, you can backtest the moving averages to see if they work on a previous timeline (by scrolling backward in the chart). Use them as a minimum indicator to help you envisage when a stock will move in your favor or move against you.
Moving averages are an excellent indicator as they are based on price, and price, as we know, is the most important of all indicators.

What Did You Learn About Moving Averages?

Moving Averages are the core and most fundamental element of Technical Stock Chart Analysis.  Using one MA is good; using 3 a lot better.

Focus on the moving average lines crossing each other and the price crossing up or down through the moving average lines.

Chart Indicators: Volume

What is the Volume Stock Chart Indicator & Is It Important? How to Analyze Volume & Interpret Supply & Demand with our Quick Reference Guide

What does Volume mean in Stocks?

Volume in stocks refers to the total number of shares traded for a particular period of time.  If 2 million shares are traded in a day, the day’s trading volume is 2 million.

What Does Volume Mean in Stocks?

Volume is usually expressed as a series of vertical bars at the bottom of a chart.  If 20 shares were traded, then the bar will show 20,000.  A Volume Chart will often show Red Bars when the stock price has decreased for the day and Green Bars for when the price rises for the day.

Is the Volume Indicator Important?

Yes, Volume indicators in technical analysis are considered important, second only to stock price itself.  When you combine the stock price movement with the increases or decreases in volume, it provides a fascinating insight into the market’s sentiment.

For example, if the stock price is going up and the volume is going down, that indicates that there fewer people buying at a higher price.  This means a change in demand and a potential change in the direction of the stock price.

Understanding Trading Volume

Look at the chart below and read further for a description of the key concepts here. The Chart maps Price, Moving Averages 10 & 30, and volume (Red for Negative, Green for Positive).

Stock Chart with Volume

3 Key Steps Referenced in the Volume Chart.

1 – Price Direction Changes Upwards – Surge In Volume

Here at point 1, we see a huge change in the direction of price; it was proceeding in a downward direction, then suddenly there was a spike in volume over 2 weeks; this is known as a “blow-off bottom.”

It indicates that a key price has been found, where the sellers have lost enough that they need to sell the stock, and the buyers have seen the price decrease enough so that they see real value in the Stock. Of course, other factors contribute, like good news or earnings results. Whatever happened, volume increased!

2 – Price Direction Change Down – Surge In Volume

The stock here increases from $20 to $38 in the following 3 months, a 90% increase, but how would we know this was about to happen. Well, buying when the moving averages crossed over would have been a good option; it would not have provided the full 90%, but it would have produced 40%, which by anyone’s reckoning is an excellent result.  However, here we see a monster “Blow off Top,” the huge red Spike; this is a powerful sign to sell as soon as possible.

From stage 2, we see the stock move in a sideways pattern and eventually decrease back down to $19; the ride is well and truly over. However, you would not own the stock, as you would have sold when the moving averages crossed.
The stock price starts to increase in mid-November 2008, but volume tells us nothing.

WHY?  Indicators do not tell us something 100% of the time, but we need to recognize it when they do.  The moving averages cross at $25, a good time to buy.

3 – Huge Volume and Price Increasing

Here we see massive buying; the volume goes through the roof. Important to note here is we are comparing volume for the stock in comparison to its history. This is the second biggest volume surge of the year for Netflix and is significant.

Why did it take off? We should always seek enlightenment!

It reported excellent earnings, and because of the recession, people were switching from buying bigger ticket items such as Cars and Plasma TVs to staying at home and renting movies. Netflix reported a massive increase in new members.

In the chart, this note shows that the price “Gapped Up.” What does this mean? This means that the stock price in extended-hours trading was so strong that the Opening Price on the following day was significantly higher than even the High for the previous day, thus showing a gap in the chart’s price pattern.

Warning: Some volatile stocks show a lot of Gaps in price. While price gaps might sound good when they gap upwards, if they gap down against you, then they are very bad. Avoid stocks with any history of strong negative gapping as gaps do not give you the opportunity to sell at the price you want to.

Volume Summary

Volume is important, and reading it should become second nature. When searching for winning stocks, we ideally should look for stocks with increased volume, so we have more chance of a quicker, less risky win.

Is it Good to Have High Volume in Stocks?

It depends.  High volume when the price is decreasing means there is a large sell-off happening.  High volume when the stock price is going up means there is a rally in the stock price, and there is a great demand for the stock.

What is a Good Volume in Stock?

Try to stick to trading stocks with at least $1 million traded per day.  That means (Stock Price * Volume) = $ Volume Traded.  There is another easy way to see if a stock has enough volume.  If you see large gaps between the open and closing price for any stock, it means there is not enough liquidity in the stock.  This means not enough volume.

Penny Stocks often do not have enough volume.  For example, if the stock price is $1 and the volume is 5,000, that means only $5000 of stocks is traded in a single day; that is simply not for a fair and equitable market.

Volume – Supply & Demand

There are some important characteristics of volume and price in the marketplace.  It is all about the direction of price movement compared to the increases or decreases in volume.  In short, it is about Buyers and Sellers.

Price Up–Volume Up Stock Price moves higher on increased volume. This is bullish as it shows us that more participants are interested in selling the stock at higher prices and that, most importantly, more people are interested in buying the stock at those higher prices.  In an uptrend, this signals the trend will continue; in a downtrend, this signals a possible correction or change in the trend’s short-term direction to upwards.

Price Up-Volume Down in an uptrend is very bearish as it suggests that although prices are rising, there are fewer participants suggesting people are backing away from the higher prices.  This also infers that the trend is weakening.  In a downtrend, it suggests a continuance of the downtrend.

Price Down–Volume Up in a downtrend may signal that a change in trend is likely; as we saw with the “Blow off bottom,” there might be a huge selling climax, then the trend adjusts from down to sideways or down to up.  This may indicate a crisis, panic selling, or simply when a stock is going out of favor in an uptrend.  The pressure is on the sell-side, and to sell, they have to accept lower prices. A strong negative signal!

Price Down–Volume Down in a downtrend can suggest that the retreat is slowing or beginning to end as fewer people are interested in buying or selling the stock at these prices.  In an uptrend, this may indicate the stock is stopping for breath or due a pullback before continuing on its upward trajectory.   Volume tends to trend in the same direction as the price trend, so PDVD also suggests a continuation of the main downtrend, or a pullback and possible continuation of an uptrend.

So you see not only the price but the direction of both price and volume is important.  This is where the Price Volume Indicators play an important role.

RSI Stock Chart Indicator

Here we have a very popular indicator called Relative Strength Index, or Wilders RSI. Developed by J Welles Wilder, this indicator measures any stock’s strength by comparing its average net up closing day prices versus its average net down closing prices for the period set. It enables you to see if a stock is overbought or oversold.

How Is Relative Strength Indicator Calculated?

RSI fluctuates between 0 and 100, 0= Oversold, and 100 being overbought. It is a leading indicator and can be used to predict future trend changes using positive or negative divergences compared to price.

Divergences are one of the most powerful ways to use most indicators. It is a leading indicator, as opposed to Moving Averages, which are lagging, and can thus indicate future directional changes.

Relative Strength 5 Step Detailed Analysis

The chart below is of Smith & Wesson (SWHC), a stock I bought back in 2009, and the chart shows clearly how RSI can be used to predict future trend changes clearly.

Using RSI on 2 settings shows how shorter and longer-term settings can show a different line but the same answer, therefore confirming each other.

  • The shorter-term setting (7 Periods Prices:7 Periods Smoothing)
  • The longer-term setting (14 Periods Prices:7 Periods Smoothing ).

Review the chart, and read below the 5 key points explaining usage.

RSI 5 Point Analysis - Detailed Example Chart

TC2000 chart courtesy of Worden Brothers, Inc.

  1. Here you can see the price highs trending downward from the period November 2008 to February 2009
  2. Here we see the price lows trending higher for the same period.
  3. So we see the forming of a Price Pennant, but which way will the Stock price go. Up or Down. For the answer, we refer to the leading indicator RSI.
  4. The RSI (7:7) Orange line tells us as early as the beginning of January 2009 that we see stronger upward momentum in RSI, although this is not reflected in the Price, it is the underlying action.
  5. The RSI (14:7) also confirms the shorter timeframe RSI settings but gives us a smoother line which can be easier to interpret.
    Finally, in mid-February, the stock price bursts through the price high trendline (point 1 above), and the stock proceeds to double in Price (100%) in 5 weeks.

What a great result, and what proof that RSI has real meaning and application.

However, if RSI is telling you nothing important, please use other indicators or review another stock where the indicators will tell you something.

To control your investment, your money, and your destiny takes hard work, but the fruit will be sweet. Long live the Liberated thinker, long live the Liberated Stock Trader.

MACD Stock Chart Indicator

MACD or Moving Average Convergence Divergence is a great way to assess a stock price direction.

What is MACD?

Gerald Appel developed MACD to easily show the Moving Averages of a stock in a way that could show the strength of the difference of the Moving Averages.  For example, if the 10 & 20 day moving averages for a stock move away from each other as the stock is going up, this means the stock is gaining strength.

MACD Usage

How to Configure MACD Settings for a Chart

Short = the shorter Moving Average, e.g., 10

Long = the longer moving average, e.g., 20 or 30

Period = the Moving average of the difference of the Short and Long above.

Use short MACD configuration for shorter-term trading 5-35-5, or longer configurations for longer-term trading 12-26-9 is popular, also 10-30-5.

Experiment and also view charts on different timeframes to test if the indicator is true from different angles.

This could go on and on; however, I will suggest now we move to the more practical use of MACD viewing it in real life on a real stock.

Please be aware that sometimes MACD does not tell you anything about a stock, but it does in many cases. As always, if the indicators tell you nothing, there is probably nothing to be told; move on and look for other stocks.

How to Use MACD

Take a look at the Netflix (NFLX) Learning Chart below.

Here we have a MACD configured of 10, 30, 5 Simple, and this is a 2 Day (per bar) Chart.

MACD Detailed Example Chart

TC2000 chart courtesy of Worden Brothers, Inc.

Step 1 – Price Growing

The stock price is in growth mode, almost doubling in the first quarter.

Step 2 – Negative Divergence

The trick with MACD is to look at the trend; it is a powerful indicator when comparing the direction of the MACD Mountains with the Price Movement.

Point 2 illustrates that although the price doubled in 2008, we saw the MACD make lower lows “negative divergence.”

We see a change in the MACD from positive to negative, and the large mountain (below the Zero Line) forms. MACD is an oscillating indicator and, as such, is always tied to the Zero line in the middle.

Step 3 – Price declining

Here we see a strong decline in price for the rest of 2008 until November. Using a trendline to show this helps us visualize the direction easier.

Step 4 – Positive Divergence

Simultaneously, the price is declining; we actually see a longer-term Positive Divergence occurring from June to December. This essentially means that the “Gas in the tank of the sellers is slowly reducing.”

However, we should not have waited until December to buy the stock. That would have been way too late. Instead, we would look to Point 5.

Step 5 – Buy Signal

MACD broke through the resistance line: here, we see the MACD breaking strongly past its previous high. I plotted a trendline in orange to show this clearly.

If you had used MACD as your BUY SIGNAL, you would have netted 56% in 4 months.

Please do not think I searched through hundreds of charts to find a good example to demonstrate here. I did not; this was a stock in my watchlist and indeed bought based on this lesson. As you can see, the dates are up to the end of January 2009 in this historical example.

Fibonacci Stock Chart Indicator

There are many ardent investors who follower the Fibonacci principles almost religiously across the globe.  Indeed, when you take a close look at applying these scientific observations, you may be compelled to take them seriously.

For this analysis example, we will use Fibonacci Retracement and apply it to the 2007 to 2008 Financial Crisis.  In fact, we will take a look at the charts a few years later, in 2011.

What are Fibonacci Numbers In the Stock Market?

Fibonacci numbers are revered in mathematics as the numbers that describe the natural world. The Sequence is simply the sum of any two numbers equals the next in the sequence.

1,1,2,3,5,8,13,21,34,55,89 etc…..
1+1=2
1+2=3
2+3=5

The theory behind Fibonacci is that this mathematical pattern can be used to predict the waves of a trend. The most important numbers seem to be in percentage terms 38, 50, 62.

Therefore, if a trend moves from $1 to 100$, it may retrace (go back down) to 1 of 3 important levels. $62, $50, $38.

Applying Fibonacci on a Chart

This is a long-term weekly chart of the S&P500; it stretches back 5 years to 2007 from 2011.  This enables us to get some perspective of the Financial Crisis in 2007 and compare that to what happened later.

SP-500 Market Technical Analysis Fibonacci Retracement September 2011

You can use Fibonacci Retracement on any chart by following these instructions.

  • Select the Fibonacci Retracement Tool in your charting package
  • Select the Lowest Point on the chart, in this case, Point 1
  • Drag your mouse to the highest point on the chart in the future, in this case, Point 2

You should then see the important Retracement levels are drawn (the Grey Dotted Lines)

Important Points to Note

  1. In the 4.5 years since October 2007, the market has failed to reach an all-time high of 1,550.

2. In 2008, when the market broke down through 1,100 points, the market collapsed.

The Market Moves Down

  1. The retracement line at 38.2% is equal to 1,125 points in the index.  This is currently a support line.
  2. Any drop through this area could see a further drop to 1,000 points, the 50% retracement line.
  3. The next drop zone could be 950 points, the 61.8% retracement line.  This maps back to 2009 /2009 perfectly.

The Market Moves Up

We can see that the 21.6% retracement line at circa 1,225 is providing resistance. A strong move up through this area would be positive.

9. Estimate the Future Direction of the Stock Price

Using Trend-lines to make Buy and Sell Decisions

So we have seen the Sideways Channel and the W bottom. But how do we know when a stock is going to take off?

The truth is we never really know.

All we can do is make judgments based on what we see. Do not forget we are only buying Stocks of companies that have

  • Excellent Earnings per Share
  • Strong acceleration in the growth of Earning per Share
  • Excellent Revenue growth

So we are, in essence, giving ourselves a great head start and reducing our overall risk.

4 Step Guide to Using Trendlines for Buy & Sell Decisions

4 Step Guide to Using Trend Lines for Buy & Sell Decisions

4 Steps to Draw the Trendlines on the Chart

  1. To evaluate an upward trend, draw a line joining the highest highs
  2. For the floor of the uptrend, draw a line connecting the lowest lows. The price here bounces 3 times of the bottom trendline but then proceeds higher. The more bounces off a trendline, the stronger the trend.
  3. A trendline is drawn to show that the price has moved strongly past the previous high; this is a BUY Signal at $35.50.
  4. Finally, the price is exhausted and falls through the bottom resistance line at $53.

Buying and selling based on the trendlines here would have netted you a tasty 49%.

Alas, life is never that easy, and showing this in retrospect does mean we benefit from hindsight. This is why Wall St.’s finest minds have a whole host of other technical indicators that accompany price to enable you to assess trend quality.

Summary: How to Read Stock Charts For Beginners

Now you know how to read stock charts, understand volume and stock chart indicators.  But what is next?  Take your skills to the next level with our 5 Star Amazon Rated Liberated Stock Trader Pro Stock Market Training Course

Video: How To Draw Trendlines

Stock Charts, Drawing Trend Lines, Live Stock Market Seminar


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Sours: https://www.liberatedstocktrader.com/how-to-read-stock-charts/

Charts reading for dummies stock

Stock Charts For Dummies

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting Started with Stock Charts 5

Chapter 1: Brushing Up on Stock Charting Basics 7

Minimizing the Emotional Roller Coaster of Investing 7

Viewing Stocks from Varying Perspectives 8

Discovering All the Tools You Can Use with Your Charts 8

Getting Organized with Your Charts 9

Customizing Your Charts 10

Putting Everything Together 10

Chapter 2: Using Charts to Minimize Your Emotional Roller Coaster 11

Getting Ready for the Emotions of Owning a Stock 11

Understanding a few market basics 12

Leveling the playing field 14

Building a Chart to Track and Control Emotions 15

Checking Out Index Charts 17

Indexes around the world 18

Commodity indexes 19

The S&P 500 20

Defining Trends 20

Part 2: Viewing the Money Trail Through Different Lenses 23

Chapter 3: Focusing on Chart Settings 25

Choosing Chart Attributes 26

Starting with the time period, range, and spacing 26

Defining the price display 29

Displaying volume and toggles 33

Setting Overlays 34

Selecting Indicators 36

Common indicators 36

Volume and price as indicators 37

Chapter 4: Burning the Candle at Both Ends with Candlestick Charts 39

Deciphering the Parts of a Candlestick Chart 40

The candle body 41

Shadows on a hollow candle 42

Shadows on a filled candle 43

Windows 44

Introducing Color onto a Candlestick Chart 45

Crafting Your Chart 46

Reading and Using Your Chart to Make Decisions 48

Knowing when candles matter 48

Buying based on bullish candlestick patterns 49

Chapter 5: Spotting Differences with Bar Charts 51

Beginning with Bar Chart Basics 51

Price bar components 51

Different types of bar charts 52

Building a Bar Chart from the Ground Up 54

Putting a Bar Chart to Work 55

Gaps 55

Short bars versus long bars 56

Trading ranges, support, resistance, and breakout 56

Chapter 6: Seeing What’s Trending with Line Charts 59

What Is a Line Chart? 59

Making a Line Chart the Easy Way 61

Reading and Using Your Chart Line by Line 62

Adding support and resistance lines 63

Knowing when lines matter 64

Chapter 7: Getting the Lay of the Land with Area Charts 67

Comparing Area Charts to Line Charts 67

Making an Area Chart You Can Show Off 69

Strengthening or dimming the area display 69

Trying different colors 70

Adding color lines to emphasize change 70

Looking at legends and labels 71

Adding a Personal Touch with Styles 71

Knowing When Area Charts Matter 72

Part 3: Using Chart Tools for Decision Making 75

Chapter 8: Charting Different Time Periods 77

Converting Candlestick Charts to Different Periods 78

60-minute to daily candle display 78

Daily to weekly candle display 79

Daily to monthly candle display 79

Weekly to monthly candle display 80

Converting Bar Charts to Different Periods 81

60-minute to daily bar charts 81

Daily to weekly bar charts 81

Weekly to monthly bar charts 82

Converting Line and Area Charts to Different Periods 83

Taking It One Day at a Time with Daily Charts 84

Looking at the daily price movement in context 84

Using a range of one year (or more) with a daily chart 86

Examining market capitalization with daily charts 88

Embracing Short-Term Thinking with 60-Minute Charts 91

Highlighting intraday price action 92

Using 60-minute charts for index watching 92

Seeing the Big Picture with Weekly Charts 94

Weekly bar charts 94

Weekly line charts 95

The big benefits of weekly analysis 95

Knowing When a Monthly Chart Can Come in Handy 96

Recognizing major long-term lows and highs 96

Analyzing investor behavior 97

Picking the Right Chart for the Right Range 98

Shifting Your Focus to Closing Prices 99

Chapter 9: Reading a Price Chart 103

Running with Bulls and Sleeping with Bears: Uptrends and Downtrends 104

Recognizing an uptrend 104

Spotting a downtrend 105

Bucking the Trend: When a Stock Isn’t Trending 107

Looking at consolidation basics 107

Recognizing different periods of consolidation on a chart 108

Reading investor behavior during consolidation 109

Leveling Out: It’s All about the Base 110

Types of bases 110

The start of an uptrend from a base 114

Reaching the Top: Muffins, Spires, or Something Else? 115

The rounded top 116

The spire 117

The parabolic run 118

The double top 119

The range trading top 120

Scaling for Profit: It’s Only Money 121

Arithmetic scaling 121

Logarithmic scaling 123

Scaling guidelines 123

Chapter 10: Harnessing the Power of Overlays 125

Keeping Track of Moving Averages 126

Plotting a moving average 126

Looking at moving averages for different periods 129

Examining the uses and benefits of moving averages 133

Getting into the Groove with Channel Investing 135

Keltner channels 135

Bollinger Bands 139

Moving average envelopes 140

Finding Your Sweet Spot between Horizontal Support and Resistance 142

Chapter 11: Using Indicators to Facilitate Chart Analysis 145

Beginning with Indicator Basics 145

Divergence 146

Bounded and unbounded indicators 147

Rolling with Momentum Indicators 147

Moving average convergence divergence indicator (MACD) 148

Momentum displays that look like the MACD 150

Relative strength index (RSI) 153

Stochastics 158

Using Volume with Price 161

Chaikin money flow (CMF) 162

Money flow index (MFI) 163

On-balance volume (OBV) 165

Accumulation distribution (ACCUM/DIST) 166

Determining How Many Indicators to Use on One Chart 167

Chapter 12: Making Sense of Relative Strength Indicators 169

Relative Strength Investing Basics: Seeking Better-Performing Stocks 170

Sectors and industries 170

What makes a strong stock 171

Four things to know in relative strength investing 172

Measuring a Stock’s Relative Strength to the S&P 500, a Sector, and an Industry 172

Creating a ratio chart 173

Interpreting a ratio chart 175

Making broader comparisons 176

Ranking Stocks with SCTR 176

Introducing technical ranking 176

Plotting and interpreting the SCTR indicator 178

Looking at the components of the SCTR indicator 179

Breaking down peer groups for technical ranking 181

Understanding market movement in the rankings 181

Protecting your capital with SCTR 183

Using SCTR for base breakouts 185

Checking Out Performance Charts 186

Using Relative Rotation Graphs (RRG) 188

Part 4: Getting Organized and Managing Stock Trends 191

Chapter 13: Organizing Charts into Industry or Sector Groups 193

Recognizing the Importance of Sectors and Industry Groups 194

Creating and Populating ChartLists 195

Creating a list with a name and a number 195

Populating a list with one or more charts 197

Building lists with industry groups or sectors 198

Using the Number in Sorted Order button 198

Removing numbers from stocks inside a list 200

Organizing Your ChartLists 201

Interesting charts 202

Temporary scan lists 202

SCTR list 203

Watch list 203

Current open positions 203

Closed trades 203

Sector or industry lists 203

ETF list 204

Market overview 204

Index lists 204

Chapter 14: Keeping Track of What’s Going On 205

Making a Watch List 206

Surveying predefined scans 206

Saving scans to ChartLists 208

Creating and Using Your Three Main ChartLists 209

Deciding which stocks to move 210

Moving stocks into your three lists 211

Setting Alerts 212

Chapter 15: Conducting Breadth Analysis 215

Investigating Bullish Percent Indexes 216

Understanding how a buy or sell signal for a single stock is recorded 217

Interpreting the results for groups of stocks 217

Studying the Percentage of Stocks above the 200 DMA 220

Looking at the basic chart 220

Comparing breadth information 220

Reviewing the Breadth of Different Exchanges 222

The NASDAQ composite breadth 222

The New York Stock Exchange composite breadth 225

The Toronto Stock Exchange breadth 226

Chapter 16: A Quick Check of the Week’s Action 227

Counting the Days 227

Up days 228

Down days 228

Inside and outside days 229

Responding to Weird Price Action 230

Volume and price bar extremes 230

Outside reversal dates on weekly charts 231

Tracking Key Events 232

Options expiration days 233

Fed meeting dates 234

Spotting a Break of Support on Indexes 235

Part 5: Personalizing Your Stock Charts with Styles 237

Chapter 17: Customizing Candlestick Charts 239

Picking Your Personal Candlestick Indicators 240

Daily candlestick charts 240

Weekly candlestick charts 242

Saving Your Personal Style 244

Creating your default ChartStyle setting 244

Saving multiple ChartStyles 245

Trading Using a Candlestick Chart with Your Settings 246

Trading a daily candlestick chart with annotations 246

Trading a weekly candlestick chart 250

Sharing Your Customized Charts 251

Chapter 18: Fine-Tuning Your Bar Charts 253

Adjusting Bar Chart Settings to Your Liking 254

Colors 254

Overlays 255

Indicators 255

Special settings for weekly bar charts 256

Trading Using a Daily Bar Chart with Your Settings 257

Trading Using a Weekly Bar Chart with Your Settings 259

Chapter 19: Adjusting Your Line and Area Charts 263

Creating a Custom Weekly Line Chart 264

Developing Your Own Monthly Line Chart 266

Selecting your indicators 267

Saving your monthly line chart 268

Trading a monthly line chart 269

Setting Up a Specialized Monthly Area Chart 270

Part 6: Putting Your Stock Charting Expertise to Work 273

Chapter 20: Using Your Charts to Inform Your Buy, Hold, and Sell Decisions 275

Separating the Strong from the Weak 275

Sector summary 276

Industry summary 279

Knowing When to Hold ’Em and When to Fold ’Em 279

Checking the speed of movement 280

Looking at typical support levels 280

Gauging gains 280

Following technical clues to help manage your trades 281

Thinking about trading styles 283

Considering big picture trends 284

Selling Stocks Before They Head South 284

Chandelier exits 284

Parabolic stop and reverse 285

Chapter 21: Putting It All Together 287

Gauging the Market’s Direction 288

Market tops 288

Leading sectors 290

Market breadth 294

Position of the indexes compared to the 40-week moving average 295

Narrowing Your Focus to Certain Sectors 296

Choosing your fishing holes: Sectors with promise 297

Investing in different sectors for ballast 298

Using SCTR reports 298

Considering income stream investing 299

Using Targeted Scans 299

Working with Price Displays, Overlays, and Indicators 302

Price displays 302

Overlays and indicators 303

SCTR and the relative strength rankings 303

Taking Away Lessons from Your Wins and Losses 304

Journaling about the market and your trading 304

Tracking and analyzing your winners and losers 305

Continuing to buy winners 306

Refraining from holding losers 307

Part 7: The Part of Tens 309

Chapter 22: Ten Common Investing Mistakes and How to Avoid Them 311

Trying to Fight the Market Instead of Following It 311

Buying a Loser 312

Chasing a 25–35 Percent Off Sale in Great Companies 313

Falling for a 75 Percent Off Sale 314

Forgetting That Commodity Stocks Are Very Volatile 314

Buying a Story Instead of a Stock 315

Investing in a Sick Sector 316

Selling a Winner Too Soon 316

Continuously Avoiding What’s Worked 317

Not Buying Stocks in Falling Markets 318

Chapter 23: Ten Tips for Cashing In on Tomorrow’s Amazingly Great Stock 319

Being Prepared for Big Moves in a Short Time 319

Understanding That You Don’t Have to Be First to Buy 320

Waiting on the Big-Name IPOs 321

Seeing Huge Gaps on Earnings 321

Watching for Crisis in a Stock 322

Using Volatility to Warn the End Is Near 322

Measuring Volatility with the Average True Range 323

Realizing That the SCTR Won’t Help Find Exits 323

Working with Bollinger Bands 324

Using the U.S Dollar as a Guide 324

Index 327

Sours: https://www.wiley.com/en-us/Stock+Charts+For+Dummies-p-9781119434399
Understanding Chart Patterns for Online Trading

How to Read Stock Charts (2021 Ultimate Guide)

Shameless plug: Learn how to read stock charts with my 156 page ebook, The Interactive Guide to Technical Analysis. Our team spends hundreds of hours testing financial products and services each year. Our reviews are honest and unbiased. If you use the links on this page to open an account, we may be compensated. Thank you for your support!

Learning how to read stock charts is crucial for stock traders that want to perform technical analysis. By understanding price patterns, traders have an edge at predicting where the stock is going next.

Do you enjoy reading stock charts and looking at volume trends, support, resistance, and drawing trendlines? Well, then you are very focused on technical analysis, which this guide introduces. Contrarily, if you like to base your investment decisions on sales growth, total debt, and metrics like EPS (earnings per share), then you are likely interested in fundamental analysis.

Stock chart types

What types of charts are available? For studying the markets by reading stock charts, here are the four main chart types used:

1. Bar charts (HLC / OHLC) – This is the most widely used chart and the default used throughout the site here on StockTrader.com. It is constructed to show four pieces of information: opening price (optional), closing price, high of the day, and low of the day. Looking at each day’s history, a vertical line shows the day’s trading range with a horizontal line pointing left to mark the opening price and a horizontal line pointing right to mark the closing price.

Daily Bar Graph Stock Chart for GS (Goldman Sachs)

2. Candlestick charts – This chart presents the same data as a bar chart, but in a slightly different format. The chart has two main parts. The first is the thin line, known as the “shadow,” which shows the price range from high to low. The wider area, known as the “real body,” measures the difference between the opening price and the closing price. If the close is higher than the open, the real body is white.

Candlestick Chart for GS, Including Shadow and Real Body for GS (Goldman Sachs)

3. Line charts – A line chart measures only the closing price and connects each day’s close into a line. Many technicians believe closing price is the only point that matters. For them, a line chart may be the most appropriate study.

Line Chart for GS (Goldman Sachs) in 2009

4. Point and figure charts – A point and figure chart is concerned only with price, not time or volume. The chart uses an "X" to mark increases in price and an "O" to mark lower prices. With this approach, it is easier to spot trends and reversals. However, since time is not used as an input, P&F charts offer little guidance on timing, e.g. how long it will take for profit objectives to be met.

Point and Figure Chart for Price for GS (Goldman Sachs)

Each chart type for performing technical analysis has its benefits. By exploring the options each approach provides, investors can determine which type best meets their needs for reading stock charts.

Stock chart components

Below I have taken a stock chart of the NASDAQ Composite and labeled the main parts. Below the chart I will explain these parts and what they mean when it comes to reading a stock chart.

How to Read Stock Charts using $COMPQ (NASDAQ Composite) as an Example

  1. Chart identification - Every chart is labeled and tells you what exactly you are looking at. So, if we look to the left of one we can see very clearly that we are looking at a chart of $COMPQ (Nasdaq Composite) INDX. The $COMPQ is the ticker symbol of the index. Just like Google has a ticker of GOOG, and Microsoft has a ticker of MSFT.
  2. Summary key - The first number displays 2303.54 which is the last price of the index. To left of this number it says "(daily)", which means we are looking at a DAILY chart of the index. You can view charts on weekly and even monthly views. Below this we can see the blue and red lines (50 and 200) MAs. These are the price moving averages which I will explain more in point #4. Bottom line is that the summary key tells us the important numbers from the stock chart we are viewing.
  3. Time period - The X axis always displays the time period. If you view the dates left to right you will find that we are viewing a chart of the months of April, May, June, and July.
  4. Moving averages - Moving averages are a form of technical analysis that help identify support and resistance on a stock chart. On this chart the red line is the 200 day moving average, and the blue is the 50 day moving average.
  5. Volume - Volume is extremely important as it helps determine market momentum. Each bar represents one day, and the red line going through the tops is the average volume over the last xx days (in this case 60). So, the taller the volume bar, the more shares of stock that were traded that day.
  6. Daily trade range - Just like volume, each red or black vertical line on the chart represents one independent trading day. If the bar is red, that means the stock or in this case the index was DOWN overall on the day compared to the previous day. Black bars mean that the stock was even or UP on the day compared to the previous day.

Volume

Volume is one of the most basic and beneficial concepts to understand when trading stocks. Volume is defined as, "the number of shares (or contracts) traded during a given period of time." This means each time a person sells or buys shares of a stock, that is considered volume.

Tallying volume is done by the market exchanges and reported via every major financial website. To hand tally volume, simply add the shares traded for each order on the fly (you can see orders real-time with any streaming last sale tool). For example:

  • Trader 1 Buys 100 shares of stock
  • Trader 2 Buy 500 shares of stock
  • Trader 3 Sells 1000 shares of stock

Total volume is then 1,600 shares for this sequence. Again, volume increases regardless if it is a buy or sell order.

It is not uncommon for stocks to trade millions of shares per day. For example, the S&P 500 ETF (SPY) trades on average around 75 million shares per market session. This is literally Billions of dollars worth of stock changing hands every day the market is open. On the other hand, smaller company stocks, known as penny stocks, might trade only a few thousand shares in a given day.

Benefits of tracking volume

By understanding what volume is and how it is tracked, we can use this knowledge to help us make better informed trading decisions. There are two key benefits to tracking volume:

  1. Support and resistance - Throw one pebble at a glass window and it may not crack or break, but throw 100 of different sizes and the chances of a break are far greater. Applying this to stocks, if one investor places an order to buy 100 shares of stock at the current Ask price, the stock may not move up. But, if 20 investors all place buy orders of different quantities, the stock is most likely going to move up in price because there are not enough sellers. Bottom line, to break through a key support or resistance level on a stock chart, volume is needed in quantity.
  2. Average daily volume - By knowing the total volume on a day, you can understand the power of influence on a given stock. The greater the volume, the more significant and overall meaningful the day was. High volume days are most often observed on earnings days or when news is released. Plotting the average daily volume also allows us to identify accumulation and distribution days on a stock chart, which can be used to identify current momentum and predict future price movements.

Learning to identify volume trends and count accumulation or distribution day strings on a stock chart does take practice. But, when applied correctly it is can give the investor a huge advantage in obtaining profits. Let's take a look at both.

Accumulation days

To understand what an accumulation day is, it is important to look at the basic meaning of the actual word. Accumulation is based off of, "accumulate", which means to, "gather together or acquire an increasing number or quantity of". You accumulate a lot of things in life: wealth, strength, friends, etc. In the stock market, accumulation is used to describe the accumulation of shares by traders. The more people that buy, the more shares that are then purchased, which means more shares are accumulated. Make sense?

Things get easier when you add the word "day" into the picture. It is exactly as it sounds: an accumulation day is when the stock closes (finishes the day) higher on volume (or the amount of shares traded) that is also greater than the day prior. So, if stock XYZ closed yesterday at $13.50 a share with a total of 100,000 shares traded, and today closes as $14 a share with 300,000 shares traded, then we can say it was an accumulation day overall.

Accumulation days are very positive events, because they signal underlying strength due to the fact that institutions are accumulating shares and pushing the stock price higher. The more buying investors do, the more accumulating that is going on, and thus more a stock price will rise.

One final important concept to understand when identifying accumulation days on a stock chart is to look for days where volume was above the 60-day average. Low volume days have little meaning, because it means few institutions were involved. Personally, I ignore them. Here's a recent stock chart of Microsoft (MSFT) to help us out.

Accumulation Stock Chart using MSFT (Microsoft) as an Example

Distribution days

Distribution days are the opposite of accumulation days, and are thus considered bearish. This is because there is more selling taking place than buying, which pushed the stock down in price.

For a day to be considered a distribution day, the stock not only has to end down (net $ change), but there also has to be more volume (total shares traded) than the day before. Remember too that, like accumulation days, the volume not only needs to be greater than the day prior, but also greater than the 60-day average.

In summary, when you think of distribution days, think of the word "distribute", or selling, or heck, the color red. With a distribution day, there is simply more net sellers than buyers. Here's examples using the same chart of Microsoft (MSFT).

Distribution Stock Chart for MSFT (Microsoft) Example

Volume quiz

Every investor should have a strong understanding of volume and its role in the stock market. Every stock gives key buy and sell signals which can be found by simply knowing how to interpret volume on stock charts. This quiz will test the basics.

1. Volume is simply the number of _______ traded in a given day.

2. In a Accumulation day, a stock closes the day _______ (up or down), whereas in a Distribution day, a stock ends the day ________ (up or down).

3. Interpreting volume is a form of fundamental or technical analysis?

4. To be considered an accumulation or distribution day, one requirement is that volume must be greater than _______?

5. Stock ABC on Monday traded a total of 150,000 shares and finished the day up. Then, on Tuesday, the stock traded a total of 180,000 shares and finished the day down. The 60 day average daily volume is 200,000 shares. What is Tuesday considered?

  • A. Accumulation day
  • B. Distribution day
  • E. Neither

Answers:

  1. shares
  2. up; down
  3. technical analysis
  4. the day prior
  5. neither because the stock traded less shares than the day prior

Support and resistance

Support and Resistance is a basic form of technical analysis that can be used as a way to predict stock price movement and help traders mark potential buy and sell points.

Let's take a look at a clean support and resistance example below.

Support and Resistance Stock Chart, CVD (Covance, Inc) Example

  1. The three "1"s show us how CVD stock found resistance at $88 three times before finally breaking through. Participating in the break would have yielded an actual return of 10% in only seven days.
  2. The four "2"s show distinctly how $80 was a key support level for CVD. The stock held up at this price area several times over the course of five months before it finally broke to the upside above $88 a share.
  3. The purple "3" shows us where the next resistance area currently is for CVD. Only time will tell if the stock will need another five month base to claim higher highs.

To help drive the concept home, here's another example of basic support and resistance.

Support and Resistance Stock Chart for ENER (Energy Conversion Devices, Inc.)

  1. A first glimpse into the resistance ENER saw around $35 a share. As we can see once the original high was made it took two more pushes to break through, which lead to a large stock price gap and new highs for the stock.
  2. Another example of ENER at technical resistance. This time it was at $73 a share and the third push was the one to claim higher highs.
  3. Here we see the support ENER has received while forming its latest base. This would also be called a support trendline. A common trend is for resistance to turn into support, which we can see with the first “3” on the left. The $60 resistance once broken then became support.
  4. Highlighted in purple shows us the next area the stock will most likely find resistance. Climbing above $83 a share would not represent higher highs but also new 52-week and all-time price highs.

When prices are falling, support represents the moment when buying overwhelms selling and prices reverse. Conversely, when stocks are moving higher, resistance is the point where selling overwhelms buying and the price increases stop.

Correctly identifying these trend changers will allow you to establish initial price targets and to develop your own sell discipline. As with other patterns we have previously discussed, knowing the fine details of support and resistance levels will increase your chances for success.

Support and resistance often act as decisive trend changers. When an existing trendline meets resistance, be prepared for a dynamic shift. For example, in the Allstate (ALL) chart, when the blue uptrend converged with resistance, prices moved lower.

Resistance Chart for ALL (Allstate Corp)

If support is violated, that same level will act as future resistance. As the Dryships (DRYS) chart illustrates, the same horizontal trendline continues after support is violated, but with differing effect.

Reading Stock Charts using DRYS (Dryships) Changing from Support to Resistance as an Example

The more often a trendline is tested, the more valid it becomes. Cliff Natural Resources (CLF) shows persistent resistance at $32.50. With four separate challenges of this level over a four-month period, we should expect any future rallies to stall at this price.

Resistance Chart showing CLF (Cliff Natural Resources, Inc) Seeing Resistance at $32.50 for Four Months

If a resistance or support level is associated with increasing volume, the trend becomes more valid. Consider the trading history of Agrium (AGU). In September 2008, $42.50 served as resistance. Each time that price level was tested, volume increases (blue circles). This pattern added weight to the $42.50 level and indicated that overcoming that price point would take significant time.

AGU (Agrium, Inc) Resistance Chart Showing Resistance with Volume

Bottom line: Support and resistance levels are key mile markers in a stock’s progress. Whenever you’re developing trading strategies, consider these points on the graph. Doing so will help set profit targets and prevent frustration when eventual reversals occur.

Channels

Channels come in three forms: horizontal, ascending, and descending. Descending channels are a basic form of technical analysis spotted commonly in up trends and are considered bullish; alternatively, ascending channels are often spotted in down trends and are most often considered bearish.

When the stock breaks out of the channel, it can make for a strong entry point. The following stock chart of Fastenal (FAST) offers a simple example of a descending channel.

Descending Channel Chart for FAST (Fastenal)

  1. Here we see how Fastenal (FAST) formed its descending channel over the course of four months. This is considered a large channel.
  2. The stock broke down and out of the channel on high volume. However, two days later on the volume three times greater than the average, the stock reversed back into the channel. If you would have sold the stock short (bet that the stock was going to fall in price), this would be a signal to cover and exit for a small loss. Strategy aside, this was most likely a news related price swing, and the very next week the broke out of the channel to the upside (above $40 a share).
  3. Slightly advanced for this post but worth noting, here we can see how the descending channel ended up acting as support at just under $38 a share (resistance becomes support). A secondary buying opportunity, the stock rallied off this support quickly ran back up above $40.
  4. The stock then claimed higher highs above $44 and broke out of a small base. This signifies the continuation of the uptrend that was initiated back at point “2”.

To be more technical, a channel is the combination of an existing trendline and an additional parallel line. Normally, the share price will oscillate between the trendline and the parallel line, enabling swing traders to create potentially profitable trades.

As long as the price remains range-bound, traders can buy at the lower end of the channel and sell at the higher end. For a deeper understanding of channels and their implications as a beginner, follow these three basic guidelines:

Channel identification Like trendlines, stock chart channels can be upward sloping, downward sloping, or horizontal. Also, we may see all three patterns on one chart. In the chart of the S&P Homebuilders Index (XHB) we have drawn three channels (black—parallel, red—down, and blue—up). The existing trendline is the solid line, and the dashed line represents a parallel channel line. Within this range each channel offered multiple opportunities to profit.

XHB (S&P Homebuilders Index ETF) Chart Showing Parallel, Down, and Up Channels

Channel breakouts A move through the channel line indicates the underlying trend is strengthening. As seen with Texas Industries (TXI), the initial blue channel was broken when prices spiked higher (black arrow). This developed a more pronounced uptrend (green line) that has continued to power the stock higher.

TXI (Texas Industries, Inc) Channel Breakout Chart

Channel trading For very advanced traders, trading within a channel can sometimes lead to greater profits than simply trading with the trend. In this chart, Baidu (BIDU) wasn't in a consistent uptrend since its January low. An investor who correctly called the bottom, bought the shares, and held this position would have a gain of 93%. While this performance is impressive, a swing trader who bought at the lower band (green arrows) and then sold at the upper band (black arrows) would have seen a total profit of 125%.

BIDU (Baidu, Inc) Channel Trading Chart

Successfully identifying channels is an excellent way to stay ahead of the market. Like all technical analysis though, practice and experience are required draw them cleanly. There are many false positives to keep an eye out for.

Daily moving averages

Daily Moving Averages (DMAs) are, alongside volume, the most commonly used technical indicator. In short, a daily moving average is a line added to any stock chart that represents the average price of a stock over the last xx days.

Traders use all sorts of moving averages. The most common is the 50-day moving average, so a rolling line that displays the average price of the past 50 days.

When reading a stock chart, moving averages can act as support or resistance. When a stock is trading around or on this line, it can tell you a lot about the stock's price action and overall trend.

  • Support - Let's say we are looking at a company whose stock price has been increasing for some time. The stock has had so many up days that it hasn't touched its 50 day moving average (DMA) for well over three months. Eventually though, the stock starts falling towards its 50 DMA, and one day it finally hits it but immediately bounces back higher in price during the same trading day. What the heck? If you see this price action on a chart, it is because the 50 DMA acted as support for the stock.
  • Resistance - If a stock has been trading below its 50 DMA for some time, then starts to trend back upwards, the 50 DMA is often a point of resistance. This is due to its widespread use by investors and traders using it as an opportunity to sell shares for a profit.

As you start to watch stocks and look at more charts, add a 50 DMA and take note. It is extremely important because whenever a stock trades at or around this line, it can really foretell where the stock is going to go next. Here are two examples:

AGP (Amerigroup Corp.) Support Chart Showing 50 DMA

ALXN (Alexion Pharmaceuticals, Inc) Resistance Chart Showing 50 DMA

Stock market trends

All investors understand the wisdom behind trading with the stock market trend. After all, few would drive their car the wrong way down a one-way street, so why try to trade against persistent market movements?

Simple to understand, but questions remain over how to determine when a series of price movements represents a true trend versus a one-off anomaly. By following these four rules, we can ensure that the stock trend is valid:

1. At least three data points needed – Only when we have three or more points of contact is a trend considered valid. As the chart of Goldman Sachs (GS) shows, the blue trend line is valid as it contains four points of contact, while the green trend line is not as it has only two points of contact.

GS (Goldman Sachs) Stock Trends Chart

2. Direction – Trends can move in three directions: up, down, and sideways. As the chart of Apple (AAPL) shows, studying prices over long periods of time often allows for the appearance of all three types of trends on the same chart.

AAPL (Apple, Inc) Stock Trendlines Chart with Up, Down, and Sideways Trends

3. Watch the slope – The slope of a trend indicates how much the price should move each day. Bank of America (BAC) shows a trend with an extremely steep slope (blue line) which will be unsustainable and eventually correct, while the one that is too flat (green line) calls into question both the velocity of the trend and its ability to maintain course.

BAC (Bank of America Corp.) Slope Trend Chart

4. Time matters – The time measurement used speaks to the validity of a trend. Generally, monthly time series carry greater importance than weekly prices, which supersede daily prices. The longer your observed time horizon, the more significant the weight carried. For example, this downtrend on Sears Holdings (SHLD) gone on for two years. Was this a sign of more damage to come? Today in 2019, Sears Holding stock no longer trades because the company went bankrupt!

SHLD (Sears Holdings Corp.) Stock Analysis Chart Showing a Downtrend for Two Years

Stock market trends are one of the most powerful technical tools we have. Learn how to apply them to your analysis and positive results will follow as you begin predicting stock trends.

Common spots where the market finds support & resistance

When tracking the overall market, knowing the most common support and resistance levels to look for offers a big advantage. Why? Because it allows investors to more accurately gauge and predict future movements while performing their analysis.

Below I break down the top five most common areas where you will see the overall market (most often represented by the S&P 500, NASDAQ, and the Dow Jones Industrial Average) find support or resistance. Learn to spot them and you will be one step closer to performing technical analysis like the pros.

Weekly and monthly highs/lows (horizontal trend lines) The most common identified areas of support or resistance for the overall market are weekly and monthly highs/lows. Because the market is constantly creating new trends, there are always these easily identifiable points on the charts. While not all act as true support or resistance, the ones that do tend to be critical as they can make or break a trend.

$COMPQ (NASDAQ Composite) Multi Month Support Trendline Example

50 day moving average The 50 DMA is a line that is formed by taking the average closing price of a stock over the last trailing 50 trading days. When the market is in a steep correction or a prolonged uptrend, this moving average is commonly seen as resistance and support (respectively). Almost all stock chart websites offer the 50 MA as a technical indicator overlay because it is so commonly used by investors.

$COMPQ (NASDAQ Composite) 50 DMA Support Resistance Example

100 day moving average The 100 DMA is a line that is formed by taking the average closing price of a stock over the last trailing 100 trading days. The 100 MA is not seen as frequently as the 50 simply because it typically draws further away from the trend. When it does come into the picture however it is very often noted.

$SPX (S&P 500 Large Cap Index) 100 Moving Average Resistance Example

Fibonacci retracement levels Fibonacci Numbers are slightly more advanced, but in their simplest form make up the key Fibonacci levels: 38%, 50%, and 62%. They are drawn on stock charts by taking the absolute high and low of a move and then determining the appropriate levels in between. Some investors use them religiously while others may only refer to them after larger more notable market swings. Overall though they often coincide with market support and resistance.

Fibonacci Support Resistance Example for $SPX (S&P 500 Large Cap Index)

200 day moving average The 200 DMA is a line that is formed by taking the average closing price of a stock over the last trailing 200 trading days. This powerful line is not often seen coming in contact with market prices due to its long term calculation. But, when it does come into the picture the market almost always reacts to it as either support and resistance.

200 DMA Support Example for $SPX (S&P 500 Large Cap Index)

Bases and breakouts

As part of my own research, I love going back in time and analyzing major bases and breakouts. A base in a period of time when a stock is trading within a defined price range. Bases can take months and even years to develop. For CANSLIM investors, a six to 12 month base is a good sweet spot to look for.

A breakout occurs when the stock finally moves out of the trading range to the upside on heavy volume. Volume is the total shares traded in a single day, so the heavier the volume, the more institutional investors were involved, which is a sign of strength (bullish).

Sina Corporation’s (SINA) breakout way back in September 2010 serves as a clean example of how to read a stock chart and what to look for.

SINA (sina.com) Base and Breakout Chart Pattern

  1. After an exhaustion gap in late November 2009, SINA peaks over the next two months then falls into a fresh base in 2010. The base would take over 8 months to form, but its clear support and resistance set the tone for its coming breakout in September 2010.
  2. SINA sets up a nice handle for its base. Note how volume surged to form the left side, then dropped off again as the formation took place and prices started creeping up. Volume then returned as the stock made its key break through $46.
  3. Volume surges as SINA moves to fresh all time highs above $48, its next major buy point. Volume on the day was the highest of the 2010 year up to that point which is exactly what CANSLIM investors want to see: a massive accumulation day.
  4. After several weeks of bouncing in the low $50s, SINA retraces back under $50 and bottoms at $48.50. CANSLIM note: pull backs to the breakout area are very common and should not be feared. In this case SINA stayed $.50 above its original breakout of $48. What gets tricky is when these breakouts fall back under their breakout points. Sometimes this can cause your stop loss order to trigger prematurely.
  5. SINA forms a follow up base in November 2010 which sets up a secondary buy area between $62 and $63.60. SINA was already up more than 35% from its original breakout at this point.
  6. After a peak and pull back in early December, volume drops off as SINA forms yet another base. After such a strong run, volume dropping off minimizes any sell pressure and affirms investors are overall satisfied with the stock at its current levels. This leads into an early January breakout through $74 on record volume yet again.

For a more recent example here in 2019, take a look here at Disney's four year base and breakout. What a beauty!

DIS (Walt Disney Co) Four Year Base Breakout Chart

Here's another great example, this one referencing Biogen (BIIB). The base we are focusing on here was a seven month cup with handle base that formed from March through October 2010. Here is a daily chart showing the original base that started an 80%+ move for the stock.

BIIB (Biogen) Breakout with Seven Month Cup and Handle Base

  1. Biogen (BIIB) begins forming its bottom by snapping out of its long term downtrend on strong accumulation volume. The 50 DMA proved to be too strong of resistance which lead into a retracement back down to $46 to test lows.
  2. A critical turning point for the stock. $45.96 is not pierced (no lower lows) and the stock gaps on huge volume (2nd highest dating back the last year) to re-test the 50 DMA resistance which is broken several days later. A bottom is officially in for BIIB.
  3. After a quick 10%+ run-up, BIIB establishes a top at $58.16 which it tests once more before trending back towards its freshly uptrending 50 MA for support. This is the start of the handle of its base.
  4. The stock breaks $58.16, a technical buy point, but immediately reverses back into its base the next day (a sell signal).
  5. News causes BIIB to gap to the downside on heavy volume. This is the last shake out of weak investors and the stock spends the next month trending up towards its high at the time of $60.28. Note the lower volume heading into the breakout at point 6.
  6. Volume jumps on increasing volume as BIIB surges out of its base, buy point $60.40, to claim fresh all-time highs.

And here is a weekly chart showing the original setup, breakout, and price action thereafter. Note the distinct support and resistance. Zooming out can often provide a clearer prospective. Beautiful.

BIIB (Biogen Idec Inc.) Breakout Weekly Chart

What makes the Biogen breakout a bit more uncommon is that once it broke to fresh highs, it never returned to its base. This is every CANSLIM investor’s dream. Why? It means that there was no risk of any stop loss order getting triggered prematurely.

Ok, one last example for this section. Back in 2010, Fossil (FOSL) was a leader among its retail peers, not only for its great growth but also the appreciation of its stock price. The 350+ store retailer selling accessories and watches went on a massive run since its breakout in August 2010. First, I have a daily chart showing how Fossil’s setup developed over 3.5 months.

FOSL (Fossil, Inc) Daily Stock Chart for 2010

  1. After finding support multiple times at its uptrending 200 DMA, Fossil (FOSL) formed a nice tight flag that lead to the break through $41.20. This was the first technical buy point for the stock.
  2. FOSL posts positive earnings and gaps through key resistance at $43. Investors should note that the high on this day was $46.30, just $.05 above the stock's all-time record high set way back in December 2007 (see the weekly chart below). The gap range was filled with support found at $43. This is an important distinction as resistance became support, exactly what bulls look for in a pull back. This was the structure for a nice tight horizontal flag that lead to the break at #3.
  3. Volume returns as FOSL doubles its daily average shares traded and surges to fresh all-time highs above $46.30. This was the proper follow up buy-point for FOSL and was the start of what has turned out to be a fantastic move for the stock.

To see how Fossil has fared since its monster breakout, view the weekly chart below. Take note of the multi-year cup & handle setup that had formed over the last three years. In the 12 months after its breakout in August 2010, Fossil stock ran over 220%.

FOSL (Fossil, Inc) Weekly Stock Chart from 2007 to 2011 Showing a Multi-Year Cup and Handle Setup

Gaps

A price gap is created when a stock closes at price X for the day, which is at 4:00 PM EST, then in after-hours or pre-hours trading the following morning is bought or sold down in price. With the buying or selling during this time when the market is technically closed, the stock then opens up at 9:30 AM EST at the new price, and the stock chart shows a literal gap. Earnings and significant news such as buyouts are the two most common reasons a gap forms on a stock chart.

Let's use a chart of Apple (AAPL) as an example. The stock closed at $174.36, then the company reported earnings which they exceeded. As a result, during after-hours trading, investors bought shares in with conviction, driving the stock price up all the way to above $188. So, the next morning at the 9:30 AM EST opening bell, that is where AAPL stock opened in price.

AAPL (Apple, Inc) Price Gap Chart

A price gap up or down in price can actually be a determination of the overall direction the stock will move in the coming months. A big price gap on very high volume, which means strong institutional buying of the stock, could mean more higher prices to come.

Here's at look at two oldies but goodies from my research collection. Way back in 2007, both Amazon (AMZN) and Apple (AAPL) had quick powerful runs after gapping higher.

In April 2007, Amazon.com (AMZN) gapped multiple times as it ran over 100% from $42 to a high of $89 three months later. Note the volume explosion on the second gap day, which is a tell-tale sign of significant institutional participation (think hedge funds, mutual funds, endowments, etc).

AMZN (Amazon.com, Inc) Stock Chart Showing Original Gap Breakout with Second Gap and Third Gap

Apple (AAPL) also gapped higher in April 2017, successfully breaking out of a base and subsequently moved up ~40% over the next three months.

AAPL (Apple, Inc) April 2017 Breakout Gap Example

Overall, gaps occur in all different shapes and sizes and can be a means of predicting the price movement of a stock over the next several months. Not all gaps tell the same story though, so it is important to conduct your own research before considering a trade.

Triangles (wedges)

Wedges are a sub-class of bull and bear flags. Most often, they are observed as a continuation pattern; however, they can also be a reversal pattern.

I don't want to go too deep into triangles here since this is more of an introductory guide, but here is an example of a symmetrical triangle (wedge) pattern followed by an ascending channel in a downtrend (bearish continuation pattern).

GOOG (Google, Inc) Wedge Chart Pattern Example

  1. Google (GOOG) forms the top half of its symmetrical triangle.
  2. GOOG forms the bottom half of its symmetrical triangle. The red “2” is where the pattern broke and the bears took control of the stock. This would be a great entry point for a short position (a bet that the stock is going to go down in price). As can be seen in the chart, Google dropped from $675 to under $450 (-33%) over the next two months.
  3. GOOG forms a bear flag, or what we now know as an ascending channel. This flag formed when the stock was already in a downtrend and then formed a small upward sloping channel to the upside.
  4. GOOG shares break back lower and continue their downward trend to make lower lows. The initial break is the ideal short entry point.

Head and shoulders

Head and shoulders setup is one of the more well-documented patterns. In a classic head and shoulders setup (which is a reversal pattern), a stock in an uptrend creates a high, pulls back, then creates a higher high, sells off down to the previous trading range, rallies back towards previous highs but stops short, then sells off and ultimately crashes through what is known as the "neckline" to much lower lows. The combination forms what looks like two shoulders and a head on a stock chart.

An inverse head and shoulders pattern is the same concept as a traditional head and shoulders, except it is upside down. They are observed far less frequently, but can be just as powerful in signaling a major shift in momentum.

Like triangles (above), I will not go too deep into head and shoulders setups here. However, I have a terrific historical chart example to show using Tiffany's (TIF), which includes not only both head and shoulders setups, but also a wedge!

TIF (Tiffany and Co.) Stock Chart Showing Head and Shoulders Setups and a Wedge

Bull and bear traps

When buying into what appears to be a great stock breaking out of a base to claim higher highs there is nothing more frustrating then seeing your investment turn from promising to junk in a matter of days. As an investor you thought you had a potential winner on your end, but the stock falls off after the, “breakout”.

Congratulations, you were victimized by a bull trap.

Bull and bear traps alike are commonly seen and can be very hard to avoid. Whether you are a seasoned market veteran or a new trader, dodging these tricky traps is no easy task.

The most common form of a bull trap occurs when a stock breaks higher, most often to several week or several month highs, then almost immediately reverses back into its base and sells off over the next week or longer. It is considered a trap because:

  1. Algorithmic traders and hedge funds identify the price point where the most automatic stop buy orders are waiting to be triggered.
  2. Next, they buy up enough shares to push the stock higher just high enough to trigger all the pending buy orders.
  3. They then sell into the strength to take profits (and potentially go net short thereafter). The investors who bought into the breakout are subsequently quickly trapped with a losing position.

These occurrences are tormenting psychologically and, well, overall they just plain stink. Below are several examples using Amazon (AMZN), Green Mountain Coffee Roasters (GMCR), and Cepheid (CPHD).

AMZN (Amazon.com, Inc) Bull Trap Example

GMCR (Green Mountain Coffee, Inc) Bull Trap Stock Chart

CPHD (Cepheid) Bull Trap Coupled with Higher Volume Example

Traps are inevitable. As traders, we all see them from time to time. My best advice to minimize the pain is to use proper position sizing. A topic for a different day, but it is unwise to buy a full position at first.

To position size correctly, consider buying say 50% of the shares with your first buy order and the other 50% over a second purchase (or split into two other purchases of 25% each) as the stock continues to moves up in price. By stacking your orders, you lower your initial risk and take on more risk only when you see confirmed strength of the underlying stock.

Three great post-earnings setups

Earnings season can be difficult to navigate for investors that do not understand the game. The examples below are not your normal "last week" type stocks. I went all the way back to 2006 to find great examples of setups that work time and time again. Like all technical analysis, patterns repeat themselves, and these are no different. During ever earnings season gems like these stocks below will appear and with a little practice your portfolio will be ready to capitalize on their future success.

Netflix (NFLX) February 2010: Descending channel After Netflix gapped to fresh highs, the stock consolidated and formed a nice channel that presented a fantastic buypoint at $62. This was the start of a huge run that has lead Netflix all the way up to $248 in 2011, or over 400%.

NFLX (Netflix, Inc) Descending Channel Setup for a Huge Run

Apple (AAPL) April 2007: Bull flag Bull flags come in many shapes and forms. While this Apple setup could be considered a simple horizontal consolidation, the setup is very clear to identify. After posting earnings price volatility drops alongside volume as the stock trends sideways. Institutional buyers then return and push the stock to fresh highs, which is also the buypoint. In Apple’s case the stock hit its buypoint of $102.60 on 5/7/07 which was the start of a multi-year uptrend.

AAPL (Apple, Inc) Bull Flag in April 2007

Intercontinental Exchange (ICE) September 2006: Multi-week base What makes this chart so compelling is its simplicity. After posting earnings and surging into the $70s, ICE pulled back and formed a basic two week base with a buypoint of $88. The stock did not trade back into its gap range and proceeded to break out through $88 on increased volume. ICE eventually peaked at $194.92 on 12/26/2007 which allowed investors to capitalize on a 150% return in just over a year.

ICE (Intercontinental Exchange) September 2006 Multi-Week Base Example

Stock charts tell stories

Once you get the hang of reading stock charts, technical analysis allows you to observe a stock's history in a whole new way.

For example, dry bulk shipper Dryships (DRYS) ran up over 1200% from the middle of 2007 to 2008 peaking at $131.48 on 10/29/08. The stock then fell 96% and returned to single digit levels. By applying simple technical analysis, the stock offers a wealth of knowledge valuable for investing in the future.

Commodities were red hot throughout 2006 and 2007 and analysts believed every investor should have exposure to this trend. Like all trends though, the party eventually ended and many market leaders were crushed alongside the overall market.

Referencing the following chart of DRYS, here are five crucial concepts to understand about technical analysis and investing in trends:

DRYS (Dry Ships Inc.) Stock Chart Rise and Fall

  1. Trends are fast moving and powerful – The run from under $10 in June 2007 to $131 in October 2008 (1200%+) was no coincidence. Institutions were heavily accumulating this dry bulk carrier as commodities continued to soar. Catch a trend right and the profits can be staggering. Furthermore, never fight the trend.
  2. Some technical patterns are prone to failure – This “W” shaped pattern for example was considered a faulty base because the 2nd dip was not lower than the first. This is important as it allows the stock to shake out any uneasy holders before moving back up in price.
  3. Heavy distribution or accumulation identifies new trends – The two heavy distribution weeks in May and June 2008 were key turning points for the stock. These reversals signaled the end of DRYS’s rally.
  4. Tight price consolidation often signals a big move is coming – For over two months DRYS and other stocks in the same group (GNK and EXM for example) traded sideways in a fairly predictable price range. Once the stock broke down below this range though heavy selling quickly followed. Price consolidations can work in both the bulls and the bears favor.
  5. Know when to sell and walk away – Any investors holding onto DRYS shares thinking the stock was going to comeback were in for serious trouble. Buying even at $80 would leave the investor down 90%+ now three months later. Either use stop losses or be disciplined enough to walk away from losers before they get too big.

For another example, this one shows the rise and fall of Travelzoo (TZOO) stock. The stock ran from $20 to $103.80 in less than eight months, then over the next five fell all the way back to its initial price levels around $20.

TZOO (Travelzoo, Inc) Rise and Fall Stock Chart

  1. Travelzoo (TZOO) jumped off an impressive earnings release. This was one of the main catalysts that really strengthened the number of institutional investors holding the stock. These institutional investors only further fueled the price rise in future months. Note that TZOO broke out of a four month base in September 2010 (not shown) which was its original foundation.
  2. A mini inverse head and shoulders breakout which lead the stock on its parabolic move higher. Key point here was the formation of the head. Notice how the stock broke under its December lows and marked "lower lows". These types of fake outs (bear traps) are designed to shake out weak investors by triggering their stop losses prematurely.
  3. The climax top comes as the stock gaps on record volume (up to that point) to fresh 52-week highs. Massive gaps like this one are often marked as exhaustion gaps as they very typically come right before or at the top of parabolic moves. Note, however, there are many other common topping formations; this is just one example.
  4. TZOO breaks out of a nice 2.5 month consolidation in expectation of strong earnings, but once released, the stock gapped heavily to the downside on record volume. This was more or less the beginning of the end of TZOO.
  5. As the stock declined, you can see how lowers lows kept coming into play and previous support became resistance. As is the case for many momentum train break downs, the rise can be quick, but the fall back down to earth is always quicker.

Closing Thoughts

Taking a closer look at any stock chart and performing basic technical analysis allows you to identify chart patterns. The more you practice, the more you will see. In turn, spotting the next big winner will be an easier task.

When I started stock trading over 16 years ago, I would look at over one thousand stock charts each week. Even today, I am still learning new patterns and techniques. Practice makes perfect.

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About the Author

Blain Reinkensmeyer

Blain Reinkensmeyer As Head of Research, Blain Reinkensmeyer has 18 years of trading experience with over 1,000 trades placed during that time. Referenced as a leading expert on the US online brokerage industry, Blain has been quoted in The New York Times, Forbes, and the Chicago Tribune, among others.


Sours: https://www.stocktrader.com/how-to-read-stock-charts

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In today’s financial world, the saying “knowledge is power” applies more to investors and traders than ever before. Understanding how to read stock charts is an important part of technical analysis and has become virtually essential for any risk-taker looking to achieve long-term success in the financial markets. For example, it helps to know how to read Robinhood charts if you’ve put all your eggs in the Robinhood basket. Moreover, understanding a range of charts helps you see more aspects of the market that the average retail trader would not see.

For traders, knowing how to read stock charts and interpret their data opens up various intraday and swing trading opportunities. Investors can also quickly peruse a chart to assess how a stock has performed over a specific period of time to understand better how the stock might perform in the future. If you’re new to trading or investing, learning how to read a stock chart as part of technical analysis can provide a solid foundation for forecasting future price action even in turbulent times. 

What are Stock Charts?

A stock chart is a graphic depiction of the price of a stock and how its price has changed over a certain period. It’s generally drawn on a grid and provides detail on the current price and historical price changes. At the same time, it can also include information such as volume and the company’s financial information. The chart’s horizontal or X-axis shows the dates of price observations in an order further from the present as you move your eyes left. 

The chart’s vertical or Y-axis shows the price level of the stock that increases when looking upward and decreases when looking downward. A stock chart will often include technical indicators in a box below the price action as well as price action overlays like a moving average (MA) of the price taken over a certain number of days. 

This example of a stock chart depicts the price of Apple Inc. (AAPL) over the past year. It includes a 20-period MA drawn in red and superimposed over the price action, as well as blue dots from the parabolic SAR indicator that gives trading signals intended to reflect short-term accumulation and distribution activity in the stock. The trading volume figures per period appear in light red and green along the bottom of the chart, with their 20-period MA shown in orange. The circled E and D letters along the bottom represent the ex-dividend and dividend payment each quarter for the stock.

Most stock charts depict the price of a stock in these basic ways:

Line charts: This straightforward type of chart shows the price, as, you guessed it, a line, at any given point during its trading day, typically the closing price, with a single point. Each price point is connected to adjacent prices with lines. 

Bar charts: The more sophisticated bar chart shows the range of the stock for the period charted by drawing a vertical line or “bar” from its high to its low price. A horizontal “flag” is then drawn to the left and to the right at the opening and closing stock price levels respectively. 

Candlestick charts: Invented in Japan, the candlestick chart is packed with even more information than a bar chart. The color of each candlestick indicates whether the stock’s price closed up or down for the period. White and black or green and red are the most popular color schemes, with white or green for up periods and black or red for down periods.

The candle’s “body” shows the range of the stock price from open to close, while 2 wicks extend from the top and bottom of the candle’s body showing the upper and lower levels respectively of the stock’s price range. Interpreting candlestick charts according to the traditional Japanese system evolved over centuries of market observation lies outside the scope of this introduction. However, it is worth researching to help boost your forecasting abilities. 

After reviewing the different types of stock charts, one thing becomes clear. An essential component of understanding how to read stock charts is knowing which chart you prefer.

Reading Trend Lines

Reading trend lines is a way to assess whether a price trend exists for a particular stock. Price trends are directional movements that consist of a set of higher highs and higher lows in a stock’s price. 

Trend lines can be drawn between those highs and lows, and they can provide technical analysts with a quick visual assessment of whether a trend exists and to what degree. 

Many analysts also use trend indicators along with drawing trend lines, such as the 200-, 50- or 20-period MA. 

Reading Stock Splits

Stock splits generally occur when a stock has risen significantly enough to make the stock price too high for average investors to buy in round lots of 100 shares. Thus, the stock split makes the stock available to more investors and generally fuels more demand, often causing the stock price to gain after the split. 

For example, if a $100 stock splits 2 for 1, then the stock would open at $50 per share the next day — existing stockholders would then own twice the amount of stock they did before the split. A reverse stock split is the reverse of a stock split. For example, a stock trading at $1 per share has a reverse 10 to 1 stock split. For every 10 shares owned, the stockholder would subsequently have 1 share at $10 per share.

Stock splits and reverse stock splits are generally adjusted for on a stock’s price chart on the day the split occurs. You do not have to take splits into account when reading stock charts produced by professional charting services or trading platforms. 

Reading Trade Volumes

The degree of interest that the market has in stock tends to appear in the stock’s trading volume numbers. Notable shifts in trading volume can offer a helpful indication to support a directional movement in the stock. 

Keep a keen eye on volume figures since changes in the stock’s activity level can confirm breakouts from the classic continuation and reversal patterns technical analysts look for in a stock’s price — they can have predictive value.  

If a stock’s price increases on a large amount of volume, for example, it’s probable that the stock will continue to rally and therefore tends to confirm the upward move. The same concept tends to hold if a stock declines on a large amount of volume. When stocks fall, volume tends to increase incrementally as stops are hit, which can further fuel the decline and can even cause a crash. 

Stock Chart Terminology

In addition to the price information appearing on a stock chart, a number of other important fundamental stock data is often included with the graph. This information has considerable significance to stock traders and is referred to with specific terminology. Whether you came here to learn how to read Robinhood charts or uncover a few pointers, these terms are universal:

  • Ticker: The ticker shows the published flow of transactions in any given stock issue. The ticker was once recorded on a tape and the information printed on it was transmitted telegraphically across the country on a ticker system from 1870 until 1970. Today’s ticker is electronic, but it has the same function of recording the time and sales price of every transaction in a stock, as well as the amount traded in most cases. 
  • Dividend: The stock’s dividend consists of the amount of money per share that a company pays out on the ex-dividend date to shareholders of record on a specific date. Shareholders need to have owned the stock on the date of record to receive the dividend typically 2 to 3 weeks later on the ex-dividend date. When a stock goes “ex-dividend,” the stock’s price is usually adjusted downward by subtracting the dividend amount from the initial opening price of the stock. 
  • Yield: A stock’s yield is the percentage of its price that is paid out as a dividend. For example, if a stock is priced at $100 per share and pays a quarterly dividend of $1 per share, then the annual yield on that stock would be $4, representing a dividend yield of 4% of the $100 share price. 
  • High and low: Stocks fluctuate during the trading session, reaching a high and a low price point in every trading session. The high and low prices can be very important to technical analysts and short-term traders who derive trading “pivot points” from these significant price levels. 
  • P/E ratio: The price-to-earnings (P/E) ratio is derived by dividing the price of the stock by the amount of money the company has earned over the year per share. Say a company’s stock is trading at $25 per share and the company’s yearly earnings are $3 per share, then the P/E of that stock is $25/$3 = 8.3. 
  • Open: The initial price of a stock on any given trading day. The opening price is determined by matching all limit and market buy and sell orders received before the trading session begins to arrive at a fair initial price.  
  • Close: The last price a stock traded at when a trading session ends. The closing price is the one used to “mark to market” positions, so it determines the value of any positions held overnight. 

Online Brokers With the Best Stock Charts

Top online stock brokers generally provide excellent charts to their clients. In addition, a number of nonbroker websites like TradingView provide excellent stock charts free of charge. Benzinga has compiled a table of online brokers with the best stock charts below. 

Sours: https://www.benzinga.com/money/how-to-read-a-stock-chart/


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