Stock Charting Basics: How to Read & Understand Stock Charts
Courtesy of Pharmboy
Technical analysis does not exist without charts. Charts are the most basic foundation to the art. Without a clear understanding of charts, it will be hard to master TA. Stock charts can predict future movement with a high degree of accuracy.
Petrohawk (HK), Merck (MRK), STEC Inc (STEC), and Sunpower’s (SPWRA) (Figure 17) charts will be used throughout this handbook (along with a few others). These are some of PSW’s favorite trading stocks, and many have made a nice chunk of change trading them …all by understanding what the chart was telling us and knowing the company’s fundamentals.
Figure 17. SPWRA bar chart.
There are 6 key components of any chart that every trader should focus on, as shown in the example above (Figure 17):
- Identification – The company name, ticker symbol, date, stock exchange, day’s price range, volume of shares traded, and percentage change are listed in a bar chart listed here. Figure 17 depicts SPWRA’s 1 year chart from December 12, 2008.
- Time Frame – In this case, a 1 year chart is used. Time frames are especially important.
- Volume – Volume tells the participation level for a particular day for a stock and is the number of shares traded during that day. Volume is used to confirm price action and spikes in volume both up and down days, mean that many traders are involved in trading the stock. Notice the massive volume spikes in May and August? A lot of shares exchanged hands that day and the significance of this and other volume signals will be touched on later.
- Trend lines – These are lines that are drawn through three or more points. The points do not have to perfectly match up, but if the trader can draw a line close enough to the trend, it’s considered valid. Figure 17 depicts a 4-month trend line from $22 to $28.
- Moving Averages – Moving averages (MA’s) smooth out average closing price over a specified period of time. In Figure 17 the 50 and 200-day MA are listed. There are also exponential moving averages (EMA’s) and others. I use 5, 20, 50 and 200 day MA are used throughout the handbook.
- Individual Days – A collection of individual days make up a chart. Many times, it is important to pay attention to each specific day. The oval depicted in…
