Reading Stock Market Charts
What Are Stock Market Charts?
Stock market charts, also called commodity charts or price charts, are one of investors' primary tools for successful trading and investing in the stock market. Data provided by stock market charts detail vital information about stock price history, highs and lows, prices of other stocks in the same category, time factors, and more. Since markets tend to repeat certain patterns, understanding and knowing how to read and interpret stock market charts is elemental for determining the best time to buy or sell. Ultimately, a trader or investor who knows how to read and decipher charts will be able to evaluate market trends and make informed decisions about the future of specific stocks.
Types of Stock Market Charts
There are many types of stock market charts, all of which provide information to help decide when to invest or sell and which stocks to select. Each type of chart has benefits and deficits, and depending on one's preferences and needs, different price charts can be useful at different times.
The three most common types of stock market charts are:
1) Line charts: Line charts emphasize the closing price of stocks for the given time frame.
2) Bar charts: Bar charts indicate the high and low price for each designated time period, as well as the opening and closing prices; also called an open-high-low-close chart (OHLC).
3) Candlestick charts: A type of OHLC that in addition to showing a stock's open, high, low, and closing prices for a certain timeframe, also relates these to prices from the previous time period. This extra information makes candlestick charts the most comprehensive.
How to Read a Stock Market Chart
The horizontal or "x" axis of a chart indicates the time frame. Depending on the specific chart, time may be measured in days, weeks, months, or years. In all charts, time moves from left to right. The vertical or "y" axis of a chart indicates stock prices, with lower prices at the bottom and higher prices (prices rising) at the top.
In order to correctly interpret a stock market chart, the time variable is critical. A chart of 12 months can appear quite similar to a chart of twelve days, yet the information it provides and its implications are vastly different.
The price 'peak' on a chart is called the "high," while the bottommost point on a chart is called the "low." Stock market charts, then, are a graphic representation of the price fluctuations of a given stock over time. An investor who is reading a stock market chart can make comparisons between current and previous highs and lows, between one low to another low, between one high to the next high, and try to identify trends in the stock market based on the chart.
Importance of Stock Market Charts
Charts are fundamental to stock market investing. The most seasoned and experienced traders rarely make a move without consulting some type of chart. Stock market charts depict price history, indicate price trends or patterns, and offer an indication as to future market movements. However, it is important to note that accurately predicting the future of a stock based on stock market charts requires a highly developed skill of many years and is by no means a simple task.