Understanding Stock Chart as a Beginner

What is a stock chart?

A stock chart is a picture, a graphical depiction that shows how a stock's price has moved over time. The chart helps you see if a stock is going up, going down or staying flat. When you apply science to them, they are visual representations of market psychology, trends and opportunities. While fundamental analysis focuses on a company’s financial health, technical analysis, which is enabled by stock charts, examines price action and market behaviours.

Understanding Candlestick Charts

Since candlesticks are most commonly used, let's understand them better.Each candlestick represents a specific time period, be it, minute, hour or day The rectangular part is called the ‘body’ and the lines sticking out are called ‘wicks’ or ‘shadows’.

• Green (or White) candles Indicates the stock went up. The bottom of the body shows the opening price and the top shows the closing price.

• Red (or Black) candles Indicates the stock went down. The top shows the opening price and the bottom shows the closing price.

The wicks show the highest and lowest prices reached during that period. For example, a green candle with a long top wick means the stock reached higher but fell back before closing still up for the day, just not at the highest point it reached.

Support and Resistance levels

As you look at charts, you will notice that stocks often bounce off certain price levels.

• Support This is a price level where the stock usually stops going down and bounce back up. It's like a floor. Buyers think the stock is a good deal at this price, as its floor level prices are expected to go up from here.

• Resistance This is a price level where the stock usually stops rising and falls back down. It's like a ceiling. So when stock price reaches its ceiling, sellers tend to sell anticipating decline in stock prices after it has reached ceiling.

These levels are important because they help you predict where a stock might change direction.

Trade volume is important

Most charts show volume at the bottom, usually as vertical bars. Volume tells you how many shares were traded during each period. High volume means lots of people are buying and selling.

This usually happens when important news comes out or when a stock makes a big move. High volume indicates high interest, which means a trend is strong.

Low volume means not many people are trading. Moves on low volume might not last because there is not much conviction behind them.

Time frames matter

A stock might be in an uptrend when you look at a one-year chart but in a downtrend on a one-month chart. Hence, time frame matters. Short-term traders look at minutes, hours or days. Long-term investors look at months or years. Choose the time frame that matches your investing time frame.