A beginner’s guide to reading stock charts

In the old days, stockbrokers made their living primarily because they were the only ones with quick access to the information needed to make intelligent stock buys. Today, that information is available almost instantly to anyone.

The trick is to understand that information, which is a different skill. Those who use stockbrokers and financial advisors are paying them for that skill. The rest of us can learn to read stock charts and use tools to make investment decisions ourselves.  

The top of a stock chart is a procession of vertical bars, running in time from left to right. Each bar represents a period, often one day’s trading.

The top of each bar represents the highest price at which the stock was purchased during that period. The bottom of the bar represents the lowest price of its trading during that period. Between them, you can see the range of prices people paid to purchase a share of the stock in a given time range.

Each bar also has a horizontal line running through it. This line is the price at which the stock closed for that period.

If the line is near the bottom of the bar, which shows the price closed at lower than its trading average for the period. If it’s near the top of the bar, it shows the stock performed well during that period. 

The bottom of a stock chart is a more traditional bar graph, showing the trading volume for the same period represented by the bars in the top half. Although most stock news focuses on price, the volume of trade may also be used in determining your next steps.  

By combining the insights from this half of the chart with the price information above it, you can watch for some combinations that lead you to determine about whether or not you should consider buying a stock. 

On both halves, you’ll often also see a line running approximately through the middle of the bars that looks like the sort of line graphs you’re used to seeing. You might also see a chart showing just this line.

Each data point on that line represents the mean price for a given period, and the course of the line as a whole shows the value history of the company.

You want to ignore the small hills and valleys it takes. That’s a facet of every stock, everywhere — the equivalent of static behind an important radio signal. Instead, you want to focus on three things:

1. Its Historical Performance. Is the line generally moving upward or downward? If it’s trending up, that’s a sign of a potentially good purchase option. If it’s trending down, that’s a sign you should avoid it absent other information.

2. What’s Happening Now. Over the past few months, is the stock trending upward or downward? Don’t just consider this in terms of short-term performance, but also in the context of historical performance. If the stock always has a dip after Christmas, you shouldn’t worry too much about a Christmas price drop since that’s a normal part of that stock’s business  cycle. Just remember that historical performance is not always an indicator of future performance.

3. Large Spikes and Drops. Look at any points where the stock price drops precipitously or rises dramatically, and do your research to find out what happened around that time. If a stock price plummeted because it split, that might be a good sign. If it dropped and never recovered when a competitor entered the field, that’s less encouraging. Was that uptick the result of a cyclical product release? Or was it from a one-time event whose repetition is less easily predicted?

Generally speaking, the trend line gives you insights or directs you to research opportunities to help understand the context of the stock’s price over time.

Some charts include multiple trend lines based on different calculated periods. This goes back to studying averages in middle school.

Take, for example, these prices for an imaginary stock over the past two weeks: $110, $115, $120, $115, $110, $90, $80, $60, $70, $80, $95, $95, $100 and $105.

The good news here is that multiple trend lines will clearly label the period each considers. Standard lines show 10-week and 40-week moving averages. The differences between them are definitely for more experienced traders, but you should know why multiple trend lines appear, what they mean and what fuels the difference. 

This line usually appears between the top and bottom halves. It compares the stock’s performance for that period to the S&P 500’s. It shows you whether the stock is leading the market or lagging behind other stocks.

If the line is rising, it shows the stock is outperforming the market overall. If it’s dropping, it shows the stock isn’t performing as well as most other stocks. That performance is no guarantee of failure or success in the coming weeks, but it is another strong data point to analyze when considering whether or not you may want to buy the stock.

Once you understand these basics and have tested yourself on live stock charts in real time, you’re ready to take your stock analysis skills to the next level.

Of course, these definitions aren’t all you need to know about any of these terms. They’re just a place to start so you’re ready for the next stage of your stock trading education.

Nancy Whitefield is a New York-based finance writer who covers the stock market.