Analysing stock charts

Analysing stock charts

To properly understand the current state of a stock, an investor should comprehend how a stock chart is analysed. The importance of these charts cannot be understated.

Why you should follow stock charts

Stock charts can give a trader an indication of the current and previous behaviors of a stock. A trader can then predict future behaviors of a stock by relying on these past trends and adjust their plans accordingly. Analysing these patterns will allow you to see the price actions of a stock over months, weeks and even days. Traders can then analyse these patterns alongside the number of stocks being traded (volume), to ensure maximum profitability.

The support and resistance of a stock restrict the prices at which investors can buy or sell a stock. A support level indicates the minimum that a stock price tends to. The resistance level of a stock indicates the upper limit of a stock. These levels are not set in stone, investors only use them as indicators of the lower and upper limits of a stock. Savvy investors will buy near the support and buy near the resistance. Pinpointing where a stock is between these two levels, indicates the supply and demand of said stock.

Analysing a stock chart

First of all, a stock chart appears like any other mathematical chart. To understand a stock chart, you will need to understand what all of its elements represent, and how these elements can change depending on the type of chart you view.

Chart composition

The chart is composed of several different elements, listed below:

X-axis- This indicates the time of the price, which can be on the scale of a day, week, month or year. The further right you move, the further along in time you are.

Y-axis- This indicates the price or volume traded of a stock as it may appear at the moment. These allow analysers to set a support and resistance level of a stock.

On-chart indicators- This can include many different indicators, such as simple moving averages, and Bollinger bands. They aim to further elucidate the underlying trends of price movements.

Off-chart indicators- These can help you decide if a stock is overbought or oversold, and can include indicators like the trading volume. It can also include a relative strength line or stochastic oscillators, or even trading volume. These are usually displayed below a chart on a PBV chart.

Moving average lines- These shows whether the average price of a stock over a period time. This chart gives traders perspective on how major investors treat the particular stock. A blue line indicates the 50-day moving average, and the red line will be the 15-day average.

Relative strength line- A chart that shows how the price of a stock may be behaving compared to its’ recent strength. The steepness of the line indicates how quickly the price is changing.

Chart type

There are several types of chart which you can analyse, which are as below:

Line chart- These are the most basic charts, with which you can view the trends in closing prices of a stock over time.

Bar chart- These consist of bars that reflect the high and low points of a stock over a period.

Candlestick chart- These graphs show the highs, lows, and close prices of a stock at any particular moment. They thus have the benefits of both previous charts without any downsides, although they may be a bit harder to follow. The bars are differentiated in colour for ease of distinguishing them. Investors, thus, tend to use these charts most commonly for their functionality.

Point and Figures chart- These indicate the percentage change of prices over time. If you only want the proportional trends in the price, regardless of the volume and price of the stocks, you should follow this chart. It can also eliminate anomalies in the stock prices which do not need to affect you.

Open-High-Low-Close (OHLC) chart- These used to be the most popular chart before candlestick charts took their place. They indicate the four important data points (as in the name) of a stock over a day’s trading. Additionally, you can learn the rising and falling momentum of a stock during a day.

Drawing tools

Drawing tools give you the option of adding or subtracting any information you require for a more accurate analysis of a stock. This can be some of the on-chart or off-chart indicators we mentioned beforehand.

Time frames

Now that you understand what the charts could indicate, you should know how you can use these to your advantage. The time period over which you analyse a stock can have a strong influence on how you should trade stock. Analysing the charts on an hour-by-hour scale means it is likely that you are day trading. Looking at daily and weekly charts will mean you have an advantage for swing trading. Monthly and yearly charts can allow you to analyse long term trends.

If you follow the daily charts, you will have an advantage on sudden trends which will allow for a quick turn-around but can be quite intense. Longer time periods will mean you can follow the price trends of a stock more accurately and gives you more time to study them. However, longer time periods obviously mean waiting longer for profits.

Stock chart patterns to follow

Your general plan of action should be buying when the stocks are low and selling them when they are on the rise. Generally, you should avoid buying shares if they are decreasing prices. Rather, you should find out if a stock has reached a low point and is set to be on the rise if you want a viable purchase.

If a trend has kept going for a prolonged period, you may need to be hesitant about its future behavior for a sudden reversal. The momentum of a stock can also indicate if a stock is set for reversals in the near future. If a price is rising but the momentum lowers, there is a hint that a high point has will soon be reached.

You should also keep an eye on the change in volume the stocks sell in. It can indicate whether the current trend of price movements has a strong or weak basis

You should determine whether the stock you are trading in is volatile. The noise this volatility creates could be very misleading to a trader if they are followed are being made on a day-by-day basis. Sudden changes of less volatile stocks can indicate more permanent and reliable changes.

Finally pay close attention to the moving averages, as they can indicate the major trends of support and resistance of a stock. More importantly, it indicates how the bigger players are behaving and how they may behave in the visible future.


Hopefully at this point, we have informed you on what the various elements of a chart indicate, and how you should be able to use them.