How To Read A Stock Chart - Top to Bottom Analysis
Updated: Sep 30
This article will be an in-depth look at how to read a stock chart from basic knowledge to more advanced technicals. If you enjoy the following piece of content, please consider subscribing at the bottom of this page for free updates on my site! Thank you and I hope you enjoy.
Glossary (click to skip to a section)
What is a Stock Chart? A stock chart shows the price of a stock over a set period of time. The goal of looking at a stock chart is to understand its history to hopefully predict its future price movement to make a profit.
Stock charts are comprised of a ticker symbol, an exchange, and historical price movement. A ticker symbol is the letters that identify a specific company within the stock market. These stocks can be traded on different exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq. In simple terms, an exchange is a middleman between the buyers and sellers.
Types of Charts
There are many types of stock charts, however, three of them are used more than 99% of the time by traders and investors.
Line Charts Line charts are the most simple of any stock chart as it only shows the close price of any interval of time. Daily charts will show daily closes while weekly charts will show weekly closes. These are great to use to keep things clean and simple.
Candlestick Charts Candlestick charts are the most common types of charts used outside of standard line charts. Candlesticks give you 4 pieces of information - open, high, low, and close over an interval of time. We will dive into timeframes a little bit later in this article.
Bar charts are very similar to candlestick charts in that they display the open, high, low, and close. In my preference, I like to use bar charts to get a more structured look of a chart when zoomed out however candles are easier to read quickly when looking at individual intervals of time.
Overall, candlesticks are the most popular however the others may help you gain another perspective that you may not have initially viewed on a candlestick chart.
What is Volume?
Volume is simply the number of shares traded during a specific interval of time. Apple ($AAPL) for example trades anywhere from 50-120 million shares a day on average. There are many different ways to interpret volume, but here is how I do it: -Strong volume on rising stock price = Bullish
-Strong volume on declining stock price = Bearish
Low volume is typically a sign of price consolidation and/or lack of market participation. I typically only look for low volume when trying to find a stock ready to make a big move. Strong volume on a breakout is typically viewed as more likely to hold the breakout as many market participants hopped in to join the breakout. I like to scan for high-volume names to find setups where there are many traders and investors coming together at a certain level.
Example on $SPY on why strong volume can be important: Strong volume at key support led to a nice intermediate bounce.
Timeframes are simply the interval of time of trading action within any given stock. For example, a daily candle represents one day's worth of price action while a 15-minute candle represents the price action of that 15-minute interval. Here are the most popular timeframes by type of market participant:
Investor: yearly, quarterly, and monthly
Swing Trader: monthly, weekly, daily, and hourly* Day Trader: hourly, 15 minute, 5 minute, and 1 minute
*I prefer the 65min chart over the hourly. This illustration explains why. The 65min fits into the day better rather than the hourly where there is one random 30min candle in the mix at the close.
Timeframes really depend on the preference and hold time of the individual investor/trader. Another thing to note about timeframes, the more you have working in your favor, typically, the better. Overall, selecting a timeframe comes down to what you ultimately prefer.
There are many ways to identify a trend of a stock. Here I will cover the two most common ways. Simple price action and moving averages. You can skip to moving averages later in the article here. The most common way to determine trend is to simply look at the patterns forming. This is commonly called simple price action. Here is an example of $SPY where price on the left half continues to make higher lows and higher highs. This is considered a bullish trend. On the right half, price makes lower highs and lower lows. This is considered a bearish trend. This is by far the easiest method and can prove to be quite effective when combining multiple timeframes.
Trendlines are some of the most common and simple technical analysis tools available. They can be used by all types of investors and traders in almost any stock or ETF. A trendline is simply a line that connects multiple points of interest, typically lows to lows and highs to highs. Let's take a look at a few examples of trendlines working well and multiple styles to trade them.
#1 - Breakouts
Buying a breakout is simply purchasing a stock when it breaks above a trendline. This break is considered the change of a trend and often can lead to big moves in a stock's price. Many times, there is an initial retest that can provide a better entry, I will dive into that next.
#2 - Retests
This is by far my favorite way to use trendlines and often has provided me with the best results. Following a breakout of a trendline, price is likely to retest before a bigger move in the direction of the move you are playing it. It is times like these you will often see previous resistance turn into new support and vice versa.
#3 - Failed Breakouts
A failed breakout is when the price of a stock breaks a trendline, tries to retest, but ultimately falls back under its trendline. The expectation of this type of move is for price to test its other key range. This $TSLA chart is a great example of two consecutive failed breakouts that led to price testing the other side of the range.
Overall, trendlines are very simple ways to measure price action and can be very effective especially when other factors correlate with your trendline analysis.
Identifying Support and Resistance Zones
Identifying support and resistance zones is another simple yet powerful tool on all timeframes once you get the hang of it. The goal of finding support and resistance is to be able to time entries and exits of a stock or ETF. There are many different methods to finding support and resistance however I will share my favorite way of doing so here. The best method to quickly identify these levels is to look across a chart to see if there are any areas where price has had strong reactions in the past whether that be swing highs or swing lows. Here is an example of $AMZN (Amazon). Notice how from 2018 to 2020, Amazon found resistance at that ~$100 range. This shows that this was a key level for bears to hold this stock down. Now that price broke above it, we have finally seen a retest of this key level which acted as strong support. This is one of the millions of examples. I'll give one more after this chart.
Here is another very recent example of a trade I took on $ABNB (Airbnb). Notice how bulls held price in that zone four different times - indicated by green arrows. Price finally broke below it and gave it its first retest. This retest came with a strong two-week move to the downside.
In conclusion, support and resistance can be as simple or as complicated as you'd like it to be. I will save you the time and research by saying I have studied many of the great traders in the world and the more simple you keep it the better.
Candlestick patterns are well-known and acknowledged in the trading industry for the simplicity and the picture they are able to paint for traders. Here are the most common candlestick patterns before I get into my favorite.
My two favorite personal candlestick patterns are hammers and engulfing candles. I like to use these in conjunction with moving averages, support & resistance zones, and trendlines. These allow a better sense of entry rather than trying to time a falling knife. These also offer clear stops if you are someone who likes to place stops at a candle's low. This is a popular strategy of mine, especially on larger timeframes.
Ultimately, candlesticks are great when used in conjunction with other trading strategies.
Stock Chart Patterns
Stock Chart Patterns are the core of many traders' toolkits including mine. I love trends, but I love patterns even more. These patterns have a history of success as they represent human psychology and the patterns which they develop over the course of market history. The goal I like to preach is to buy the retests as they have a higher probability than that of buying a breakout. This can turn out to be not the case in a raging bull market where stocks continue to all-time highs without looking back. It depends on the environment in which you are trading. To determine a price target of any pattern, it is typically the length of the beginning of the pattern itself. Examples are included below.
Here is an example of a Head & Shoulders pattern I had called out on Twitter on the $SBUX (Starbucks) weekly timeframe. Originial tweet here.
Here is an example of a bull pennant on $TSLA back in 2020. Notice the profit target is the length of the flag pole heading into the bull pennant.
What is a moving average? A simple moving average (SMA) is simply the average price over a set interval of time. There is a moving average called the exponential moving average (EMA), these simply weight previous price action more. There is no real answer on whether simple or exponential is better. Personally, I like to use EMAs but that is just a preference on how I like to trade. Moving averages are great for identifying trends in the stock market. Today I will cover the three most popular moving averages which are the 50 SMA, 100 SMA, and 200 SMA. The 50 SMA gives you the most recent average out of the three while the 200 SMA gives you a more long-term view.
Overall, moving averages should be a part of your toolkit as they are widely recognized in the investment/trading industry. There are too many strategies to cover in this article itself so if you are interested in how I like to use moving averages, click here for my personal strategy.
Relative Strength Index (RSI)
"The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security." (Investopedia.com) A popular method of using RSI is looking at is as an oversold/overbought indicator. The popular methodology is that price is oversold under 30 and overbought over 70. There is a lot of debate on this strategy and I have some other ways of viewing it that I have seen work better. Let's dive into the second most popular way to use it.
A popular way of using RSI is to spot divergences. What is a divergence on the RSI? When a stock's price continues to make lower lows BUT the RSI continues to make higher lows, this is known as bullish divergence. Here is an example that marked the bottom of the 2008 and 2009 recession on $SPY's weekly chart. Overall, the RSI is a very popular tool among traders though it is recommended to be combined with other strategies for best results.
Moving Average Convergence Divergence (MACD)
"Moving average convergence divergence (MACD, or MAC-D) is a trend-following momentum indicator that shows the relationship between two exponential moving averages (EMA's) of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA." (Investopedia.com)
The MACD is a great momentum tool with multiple applications. Here I will cover the most popular which is the MACD cross however, similar to RSI, bullish and bearish divergences are viable strategies as well.
Here is an example of three different weekly MACD crosses on $NVDA. As you can tell, it is far from perfect, but when combined with other strategies, indicators, and timeframes, it can be a helpful tool to measure momentum.
In conclusion, there are thousands of ways to view a stock chart, it comes down to the style you choose to adopt. Hopefully, this article provided a good stepping stone to learning more about the different views of technical analysis. If you enjoyed it, please consider subscribing down below to receive free frequent updates on my site. Check out my Twitter here: www.twitter.com/yocumscharting
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