Charts tell a lot about the stocks and their performance. A person can tell while looking at charts that prices are moving up and down, however, it takes interpreting the chart to understand the fluctuations and their effect on the performance of stocks. Reading a chart helps in taking decisions like whether to buy, sell or hold the stocks. Hence, reading a chart is vital in the stock markets.
Price and Volume
There are many types of charts available in the stock markets such as line charts, candlestick charts, bar charts and many more which can be viewed in different frames like daily, weekly, monthly etc.
There are many different types of stock charts that display various types of information, however, all stock charts exhibit price and volume information that investors can use to make investment decisions and hence make profits. On this stock chart, the blue and magenta colored marks show the price history. The amount of trading history each bar shows is based on the given period of a chart. For example, each price bar depicts the prices the stock traded during that day on a daily stock chart. Likewise, on a weekly stock chart, each price bar depicts the prices the stock traded during that week.
Stock’s high-low price range is shown in charts by the length of each vertical bar. The top of the bar relates to the highest price paid for the stock and the bottom of the bar relates to the lowest price paid during the given period. The small intersecting horizontal slash implies the current price or where a stock closed at the end of the period. If the price of most recent trade is equal to or greater than the prior period’s last price then price bar will be shown in blue color and if it is less than the price of the previous period then it is shown in magenta.
The vertical lines shown at the bottom of the chart represent the number of shares traded during the given time period of the chart. The length of the volume bar indicates a value that corresponds to the scale at its right. The color of a volume bar is decided by its corresponding price bar. If the most recent trade is equal to or greater than the prior period’s last then blue color is shown and if it is less than the previous period then it is shown in magenta.
Moving averages are shown in stock charts to show the direction of a stock that may be trending and to smooth out volatility. Also, moving averages makes it convenient to perceive divergences from an established price trend by imparting context for price and volume movements.
50-day moving average is indicated by the red line cutting through the price bars. This shows the average price over previous 50 trading sessions and is computed by adding the closing price of last 50 trading sessions and dividing by 50. Afterward, the black color line is the 200-day moving average. The average price of the previous 200 trading sessions is indicated by this line and this is computed by adding the closing price of last 200 trading sessions and then dividing by 200.
Growth investors are willing to see moving averages trending up and the current price of the stock to be close above the trailing average as this shows that stock is likely to continue increasing in price. On the contrary, value investors prefer stocks that are below a moving average so as to take a stock that is at discount, hoping the stock to reach its average price sooner.
The red line cutting through the volume bars is also a 50-day moving average, however, this one shows the average number of shares traded over the last 50 trading sessions. When viewing a daily chart, this line represents a 50-day moving average volume level. This line is derived by adding the volume of the last 50 trading days and dividing it by 50. Volume above or below the average for a specific period is crucial and leaves an impact on stock chart analysis. For instance, above average volume on a daily stock chart can confirm the importance of a price move. However, it may be confusing whether prices will continue in that direction if the volume is below average.
Relative Strength Line
Relative strength line tells if a stock is a leader or laggard. This line compares the price performance with S&P 500.
A stock is said to surpass the general market if relative strength line is sharply rising. On the other hand, relative strength line trending down indicates that a stock is straggling in the market.
Relative strength line is shown by number 3 in the above chart.