About Stock Market Charts
If you're interested in trading stocks on a short-term basis, understanding the purpose and use of stock charts is essential. Stock charts have been around a long time, but today they're a more popular trading tool since many online stock charting programs are available. The article below explains stock charts, their main features, and how they are used. You'll find it helpful to have a sample chart available so you can identify the main features and how a stock chart is formatted.
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Types
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Some stock charts track stocks on a day-to-day or weekly basis, while others provide an overview of a stock's trading history for several years. The simplest type is the line chart, which shows the stock price (usually at market closing). Bar or candlestick charts are more popular because they can show the range from high to low prices for each day, week or month.
Features
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A stock chart gives you a lot of information besides the graph of prices. At the top, you'll find the stock symbol and date, along with the high, low and closing price. The volume of shares traded will usually be here as well. Located below this will be the moving average. This is the average price of the stock for a specified time period and will be labeled MA(90) or MA(60) where the number tells you how many days are included in the average. At the bottom of the chart there will usually be a bar graph that tells you the daily volume of shares traded.
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Function
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The price of a stock can be rising, which is called an upward trend (on the chart, the graph will be headed toward the upper right). It also can be falling, called a downward trend (with the graph headed toward the lower right on the chart). Occasionally, the stock is in "consolidation," meaning it's not changing much either up or down. The purpose of the stock chart is to help traders identify upward trends early, so they can buy in early, and to spot a change to a downward trend early and sell.
Considerations
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The key to using stock charts is to learn to identify patterns in a stock's behavior. Here's one way traders use stock charts. In order to identify trend changes, traders look for price support and resistance levels. On the stock chart, a price support is a low price beyond which the stock doesn't go---when it reaches the price support level it is likely to reverse direction and start trending back up. A price resistance is just the reverse. It's a high price that the stock tends to stay under. Sometimes a stock breaks through a price support or resistance. For example, a report of higher-than-expected earnings can send a stock price shooting upward.
Benefits
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The wide availability of stock charts and online charting tools has made short-term stock trading less uncertain. However, investors seeking long-term investments should also learn to use charts. If you identify a company whose long-term prospects make it a good investment, you still want to get the best price you can. Buy using stock charts, you can identify when the stock is trading at a lower-than--average price and do your buying then, saving you money and increasing the return on your investment.
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Resources
- Photo Credit Chart courtesy of Stockcharts.com
