How to Read Stock Market Charts
Stock charts are online everywhere these days. But just exactly what should you look for in a stock chart? What do you try to make of all those price movements? The most important thing is to keep it simple. Ignore the fancy indicators that you can get with the charts and focus on just a few simple ideas.
- Difficulty:
- Moderate
Instructions
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1
Find the trend direction. This might be the single most important, yet overlooked, information in a stock chart. Price trend direction can be up, down or not trending. Much of the time, prices are not trending, and this is called "consolidation."
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2
Use a 20- and 50-day moving average (MA) to determine trend direction. Most charts will allow you to set the length of time for MA. Generally speaking, when the 20-day MA is above the 50-day MA, the stock is trending up. If the reverse is true, then the stock is trending down.
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3
Determine where price support is on the chart. By looking at the price history going back 3 to 12 months, you can see where prices have held up on a consistent basis. For instance, if XYZ stock has dropped to $20 several times in the past 6 months and then risen again from that price, you can be sure that $20 is the historic price support for that stock.
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4
Figure out where price resistance is on the chart. The opposite of price support, price resistance is the price a stock has failed to rise past on several occasions. If XYZ stock has risen to $50 three or more times in the past 4 months, and fallen back each time, then $50 is solid price resistance for that stock.
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5
Follow an old rule in stock trend analysis: "The trend is your friend." Buy only stocks that are trending up, and sell stocks when they are trending down. Use the 20/50-day MA crossover as your guide. When the 20-day MA crosses over the 50-day MA, the trend is generally turning up, and vice versa.
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6
Use price support and resistance as further guides for when to buy and sell a stock. If the price of XYZ stock drops below an important area of support, that's a good time to sell. Conversely, a good time to buy is when price holds above a historic support area, and also when prices "break out" above an old area of price resistance.
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