How Do You Read a Stock Chart?

I cannot imbed the audio, but if you want to hear him explain his ideas in 7 minutes use this link. QB Thank you Shaza for sending me this as it will help everyone except those who already understand charting.
by Andrew Horowitz

In this article we're take a look at how to actually read a stock chart.

If you remember, in our last article we took a look attechnical analysis and discussed why people might find it helpful to use (of course along with fundamental or quantitative analysis) to make better investment decisions.  Let's now discuss how you can use a basic stock chart as a tool to filter out stocks to buy.

What is a Stock Chart?

A stock chart is a chart that shows the past prices of a particular stock. Stock charts can help you choose better stocks and make better smarter investment decisions. Now really what we’re talking about here is a pattern of prices. The price movement is basically plotted on a day by day, minute by minute, hour by hour basis and then what happens is it is drawn together with a bar or a line and we can see the trend.

There are many places online where you can find really good websites that show you charts. Let me give you a few examples.

Let's use as an example because it is one of the largest and most popular websites for charting stocks, plus it has a wide visual section and a really great availability of chart patterns and shows you how to read charts for those interested in learning more.

When you look at a price chart of a stock or an index, you are looking at the graphed or charted historical prices of historical prices for a specific index or stock. The price of the stock is on the y-axis or vertical axis and the time span -- be it in days, weeks, or months -- is on the x-axis or the horizontal axis.  We are interested in looking at how prices changed and have they changed over time.  Many stock charts will also show volume underneath the graph, which represents the activity of trading or investment in a stock. Technical analysts are most interested in how a stock's price and volume relate.

How to Use Stock Charts

Any charting software will allow you to change the timeframe of a stock so that you can compare longer time periods, such as weeks or months, or shorter time periods such as days.  You can change the settings to look at a monthly, weekly, or daily chart. You can also look at intraday charts, but those aren't as helpful for selecting stocks in which to invest -- those are used more by day traders who rarely if ever look at the fundamentals of a stock.

Most people like to look at line charts which connect the dots of price changes over time.  Other people like to look at bar charts which show each day (or week, or month, depending on what time frame you are viewing) as a bar that shows the opening price and closing price as a horizontal hash mark (the open is on the left while the close is on the right) as well as the high and low of the day (the high is of course at the top of the bar and the low is at the bottom of the bar).  You can also choose to look at "candle charts" which simply color in the difference between the open and the close.  There are plenty of resources to study if you want to learn the specifics of bar or candle charting, but we'll just focus on the simple methods here for right now.

By looking at the shape of the price and the angle of movement, you can see whether or not a stock is in a strong trend, weak trend, or no trend at all.  The most preferable sight would be to see a stock in a steady but not aggressive uptrend or about a 45 degree angle.  Remember back to the basics of technical analysis which state that price moves in trends and these trends have greater odds of continuing than of reversing?  Again, if we are trying to find a stock to buy, we would do better to buy one in a calm uptrend instead of one in a steep down trend if both stocks have similar fundamentals or ratios.

Stock Charts and Moving Averages

Another way you can see if a stock is in an uptrend or downtrend is to add simple moving averages to your chart. A moving average is a tool that takes the average stock price over a period of time and then plots it over the price chart.  For example, many people like to see if the current price is above the 200 day simple moving average. They will consider a stock to be in an uptrend if it is above this level and in a downtrend if it is beneath it.  A 200 day simple moving average takes the last 200 days, averages them, and gives you the average price, which is plotted on your graph.  You want to know if the stock you are studying is above or beneath this average.

Other people like to use a 50 day moving average when looking at a daily chart or a 50 week moving average when looking at a weekly chart.  If you use the 50 week moving average on a weekly chart, you are really seeing what the average price of the stock is for about a year since there are 52 weeks in a year.  You want to know if price is above its annual average price or beneath it.  All things being equal, you would prefer to buy a stock that is above its 50 week moving average as opposed to one that is beneath it. Many charting programs orwebsites will already add in a moving average for you on the chart, but you can change the settings to use the most popular moving average.

Using the Trends to Select Stocks

Most often, stocks that are rising will continue to rise until a break in the trend develops.  Many people want to find a cheap stock and buy it just because it's cheap. Well that's not the way to become a winning investor!  Look back to 2008 to see how many stocks that became cheap got even cheaper!  Many stocks fell to $50 per share then to $40 per share and then $30 per share and people thought that was very cheap.  Then they fell to $20 per share and some stocks even fell to less than $10 per share!  When a stock is falling, it's usually a better idea to let it keep falling and then wait to buy it once you are sure it is rising.  That is why people who read charts would rather look to the trend of a stock and look for one that is rising, not falling.

When you have discovered a handful of stocks you want to buy based on their ratiosearnings,growth, or other pieces of data, you can then turn to the chart of a stock to get more information which can help you make your investment decision.  All things being equal, you would prefer to buy a stock that has been steadily rising and is above its 50 day and 200 day moving average.  You can use other moving averages as well, but these will often keep you on the right side of the market.  There's no guarantees of course, but we are looking to put the odds in our favor as much as we can when we choose to one stock from the thousands available to us for our portfolio.

Next week, we'll cover how to tell if a stock is a good buy, so stay tuned!

This is a really great site for new people to this site, since we talk a lot about Technical Analysis. Andrew Horowitz runs The Winning Investor, but the is better known as The Disciplined Investor Enjoy the Podcast and Articles, Shaza
Here is a link to The Disciplined Investor too: