How to Read the Stock Market Chart
The price chart is the most fundamental tool in stock market investing. Traders and investors rarely make decisions for stock purchases without first consulting a chart. A chart of the stock market or an individual stock shows previous price history and offers some insight on how the investing public already has participated in the market. Reading a stock market chart is not complicated, but making accurate predictions based on its information is a skill that takes years to develop. That said, anyone can learn the basics of reading a stock market chart.
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Instructions
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Launch stock market charting software. Many brokers provide proprietary trading programs to their clients. The Internet also provides websites that offer comprehensive stock market charting features.
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Type in the ticker symbol of the stock you wish to chart. Most charting programs have a clear field where this symbol is typed. If you wish to chart a specific stock, enter its ticker symbol, which may contain up to four letters. If you wish to chart the entire stock market, enter a ticker symbol that reflects a stock market index. For example, the ticker "SPY" tracks the S&P 500, which generally is considered to equate to the overall American stock market.
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Press "enter," "go" or "chart" in the charting software to generate the chart.
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Identify the range of prices on the vertical axis to the right of the stock chart. All stock charts show prices as a "y" coordinate. Lower prices are at the bottom, and prices rise as you move up along the axis.
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Identify the time frame of the chart on the horizontal axis at the bottom of the chart. This is the most important variable on a stock chart. Time moves from the left to the right. It is important to note how much time passes in the display of the chart. A chart of just a few days may look similar to a chart of two years, but the information will be very different.
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Identify the price fluctuations that occur as time passes and the stock moves up and down in value. All stocks fluctuate. When a stock rises and then turns around to decline, this peak on the chart is called a "high." Likewise, its mirror image is called a "low." These terms are widely used in financial media and investment newsletters.
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Compare subsequent highs and lows to one another. For example, when stocks rise and create a high, is this high above or below the price of the previous high?
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Identify trends on the stock market chart. Trend recognition is the most basic pattern to see on a price chart. It also is among the most powerful patterns. A century-old concept called Dow Theory defines a trend as a sequence of "higher highs and higher lows." If a new high is created that is higher than the previous high, and it declines to form a low that is higher than the previous low, the stock is trending. Investors often will buy into a trend during one of the declines with the expectation that it will reverse and create another new high, thus leading to profit.
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Tips & Warnings
As you become fluent with trend recognition, you eventually can learn to identify other chart patterns that are not as obvious. It can take a long time to develop the skills necessary to quickly identify all possible patterns, so some patience is required.
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