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How Do You Read a Stock Chart?
Learning to read a stock chart is the single most important skill for investors. Stock charts show you a history of a stock’s price and volume over a period of time.
Trained investors use stock charts to spot trends and buy/sell signals in what’s known as technical analysis.
With a little training and practice, anyone can use stock charts to make trades at the optimal time and price.
WHAT DOES IT ALL MEAN?
There are different kinds of stock charts, but only MarketSmith charts have all these features (and more) in one place.
Tip: If you only look at 2 charts, choose the Daily and the Weekly. Daily charts are good for spotting specific buy and sell signals and optimizing your trades, while weekly charts are good for spotting longer-term trends that measure a stock’s strength.
- Price Bars: This shows the range of a stock’s price during the day. The horizontal hash mark shows the price where the stock closed for the day. The color of the price bar indicates whether the stock closed up (blue) or down (red).
- Moving Average Lines: The red line shows the average share price during the last 50 days (on a daily chart) or 10 weeks (on a weekly chart) of trading. The black line shows the average share price during the last 200 days (on a daily chart) or 40 weeks (on a weekly chart) of trading. It’s helpful for visualizing trends in a stock’s price.
- Volume Bars: Shows the volume, or amount of shares traded during the day.
- Volume Moving Average Line: The red line shows the average volume for that stock over the last 50 days.
- Volume Percent Change: A measure of the relationship between the most recent trading activity to the number of shares traded on an average daily basis (over the last 50 trading sessions).
- Relative Strength Line: Compares the price movement of a stock to the price movement of the S&P 500 (which is often used to represent the overall market). If the line is trending up, the stock is outperforming the S&P.
WHY VOLUME MATTERS
Volume is an important indicator because it shows demand and institutional buying. Like in economics, an increase in demand tends to raise the price. High demand by big institutions (like mutual funds, banks, pensions and hedge funds) is one sign that a stock is headed higher, since institutions are responsible for about 70% of the trading activity in the market.
What is a CHART PATTERN?
Investing legend William O'Neil researched the best stocks of all times and found that the same patterns kept showing up on their charts before big price gains. If you learn to spot these Chart Patterns, you can time your trading to buy as a stock is breaking out and preparing for big gains.
WHY DO CHART PATTERNS FORM?
As a stock gains over the course of its price run, it may periodically pull back to form areas of price consolidations—also known as chart patterns or bases. That happens as some large investors sell shares, taking profits after a run-up.
THE 3 MOST COMMON CHART PATTERNS
CUP WITH HANDLE
- Most common and profitable chart pattern
- Resembles a teacup viewed from the side
- Winning stocks often start big runs by forming this pattern
- Length: 7-week minimum
- Base Depth: 15-30%
- Ideal Buy Point: 10 cents above peak in handle
DOUBLE BOTTOM
- Often occurs when market is choppy and volatile
- Looks like a lopsided “W”
- Can set stage for huge price gains
- Length: 7-week minimum
- Base Depth: 40% or less
- Ideal Buy Point: 10 cents above peak in middle of the “W”
FLAT BASE
- Often occurs after a stock forms a cup-with-handle or double bottom
- Milder decline than other base patterns
- Shorter time frame
- Length: 5-week minimum
- Base Depth: 15% or less
- Ideal Buy Point: 10 cents above peak within the base
