Learning how to read stock charts are very important if you want to know what’s going on with the movement of a stock, and it helps us predict where the stock price is going. Don’t you want to be able to predict going to the moon? Instead of staring down at your phone, hoping the numbers go higher? Momma didn't raise a little boy who crosses his fingers after unloading $5,000 on a penny stock.
If you’re into reading stock charts and looking at volume trends, support, resistance, and drawing trendlines... well, then you’ll be interested in technical analysis which I cover in my articles. If you’re into basing investment decisions on things like sales growth, total debt, and metrics like EPS (earnings per share), then you are likely interested in fundamental analysis, which I do combine in my trades at times. Stocks under $5 are trash, so I don’t spend too much time analyzing their numbers. They’re literally designed to make money off on the market.
Stock Chart Types
1. Bar charts- Design 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.
2. Candlestick charts – 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. The shadows indicate buying/selling pressure, and will often create candlesticks that indicate where the price can move. I would love to go over what each candlestick means, but there is plenty of information online that would explain it better than I can.
Stock Chart Components
Below are the components of a stock chart with numbers representing the component. This is on a line bar, and I don’t ever use it but it’s what I found so deal with it.
- Chart Identification – Every chart is labeled and tells you what exactly you are looking at. The top left shows you what company or index you are looking at. The $COMPQ is the ticker symbol of the index. Just like Facebook has a ticker of FB, and FISKER has a ticker of SPAQ (pre-merger, wink).
- Summary Key – The first number displays 2303.54 which is the last price of the index. To the left of this number it says “(daily)”, which means we are looking at a DAILY chart. 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 average. It simply tells us the price, and the price is affected by technicals and also by outside forces, like catalysts and earnings. Many times, the price is not reflected by fundamentals. Many times, it's hype and speculation. That's what I like to capitalize on. Like, if I'm at the same bar as my ex-girlfriend and many guys are hitting her up, I know to stay away because the fundamentals suck, despite the low hanging top luring in these "investors". I would definitely go short on her.
- Time Period – The X axis tells us the time period, in this case, months.
- 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. Support and resistance are important because they tell us the floor/ceiling of a stock.
- Volume – Volume is extremely important as it helps determine market momentum. Each bar represents one day, and the red line going through the bars represents 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.
- Daily Trade Range – Just like volume, each red or green 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. Green bars mean that the stock was even or UP on the day compared to the previous day.
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.” Each time a person buys or sells a stock, that is volume.
Marking volume is done by the market exchanges and reported via every major financial website. If you want to calculate it yourself, you’d add the shares traded for each order on the fly. An example would be
- Trader 1 buys 100 shares of stock
- Trader 2 buy 800 shares of stock
- Trader 3 sells 1000 shares of stock
Total volume is then 1,900 shares for this sequence. Volume increases regardless of if it is a buy or a sell order.
It’s normal for stocks to trade millions of times a 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. I like to focus on penny stocks because they’re cheap, fun and volatile. They’re like a cheap date, and if they suck in bed you can toss them out the trash. KIDDING… sort of.
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:
- Support and Resistance – Throw a tiny pebble at a glass window and it may not crack, but throw 1000 pebbles 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 30 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. Supply and demand.
- Average Daily Volume – By knowing the volume of a stock, you can understand the influence that it has on the movement. 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. Pinpointing 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 recognize volume helps traders identify accumulation and distribution on a stock, two important factors that are paramount in where you enter/exit a position.
The market movers make the market, they are the wholesalers whose job is to buy and sell securities. They are the professionals, and we as retail will never be on their level or know what they know. Manipulators of prices using news that may not even be relevant. These windows of opportunity are not exclusive to just them, but also to us retailers.This is why volume is our holy sword and shield to fight back against them.
Here's a quote from a good read Volume Price Analysis. (Here's the link: https://www.fx-arabia.com/vb/uploaded/3212_11399310873.pdf)
"Do these companies then work together? Of course they do! It goes without saying. Do they work in an overt way? No. What they will all see, is the balance of supply and demand in general across the markets and specifically in their own stocks. If the specialists are all in a general state of over supply, and a news story provides the opportunity to sell, then the market markers will all act pretty much in unison, as their warehouses will all be in much the same state. It really is common sense once you start to think about the markets in this way."
Volume applies to all markets, and in the futures markets, the buying and selling reveals when the market is running out of juice. It reveals whether buying interest is rising or falling on a daily basis. It reveals all the subtleties of pull backs and reversals on tick charts and time charts from minutes to hours. Volume is the fuel that drives the market. Volume reveals when the major operators are moving in and out of the market. Without volume, nothing moves!
**Not a financial advisor. Articles are opinions only.
Find part 2 HERE.
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