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How to Read Stock Charts

A basic foundation of researching stocks is the stock chart. Stock charts give us a picture of how stocks have performed in the past, and can give us clues on how they might perform in the future. A basic chart simply displays a stock’s prices over a certain period of time. The time period can be any where from hours to years to decades. Commonly charts would be daily or weekly prices over a period of 1month to 1 year (52 weeks) along with each day’s/week’s volume. The stock’s price is often displayed in 1 of 3 ways – line chart, OHLC chart, or Candlestick chart.

  • Line chart – The most basic chart. Shows the closing price for each day or week over the time period. 
Line Chart

Line Chart

  • Open High Low Close (OHLC) – shows the day or weeks range as a vertical line with the opening (1) and closing (4) prices as horizontal lines coming off of the vertical line. It should go without saying that the high (2) is the top and the low (3) is the bottom of the vertical line.
OHLC Chart

OHLC Chart

  • Candlestick – similar to the OHLC, but resembles a candlestick. Up days are often displayed as an empty box or filled green, and down days are often filled red. The opening (1) and closing (4) are the top and bottom of the box (if up day then the opening is the bottom, if down day then the opening is the top). The high (2) and low (3) are represented by the vertical line.
Candlestick Chart

Candlestick Chart

I prefer the Candlestick chart as I think it gives the best visual representation of a stocks history. However most chart hosting websites will only display a line chart with the closing prices when viewing the history over a year or more in the past.

One key aspect of stock charts is the volume. Volume is the amount of shares traded for each period of time (hour, day, week etc). If you spot a spike in volume, that is often an indicator of institutional investors (mutal funds, pension funds, hedge funds) buying or selling large amounts of shares. If the stock price goes down on high volume then that indicates institutional selling (a bad sign), and if the price goes up on high volume that indicates institutional buying (a good sign). More on volume in an upcoming post on chart patterns.

Tags: , , | Category: Beginner Investment, Stocks

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