Warning: I’m nerding out today … on how to read stock charts. Scoff all you want, but charts are critical to trading smart.
One of my all-time favorite books is “Reminiscences of a Stock Operator,” by Edwin Lefèvre (1923). It’s a biographical novel based on the life of legendary trader Jesse Livermore.
The main character in the book, Larry Livingston, goes through ups and downs as he learns to trade. He gains and loses fortunes more than once.
On the subject of reading stock charts, Livingston says this…
“… a chart helps those who can read it or rather who can assimilate what they read. The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke.” (Emphasis mine.)
Reading stock charts is fundamental to trading penny stocks. When I started trading I put stock charts up on my wall. I studied them and learned to understand what they meant.
I learned to love charts and hope you will, too.
In today’s post, I’ll explain chart-reading basics. I’ll show you the information charts can provide and why you should study charts from the past.
I’ll also give you patterns to look for and links to read more about specific patterns. Finally, I’ll provide links to sites where you can study charts. For a deeper understanding of charts, I suggest you apply for the Trading Challenge.
Let’s get straight to it…
Table of Contents
- 1 What Is a Stock Chart?
- 2 How to Read Stock Charts for Beginners
- 3 How to Read Stock Charts — Infographic
- 4 Resources for Stock Charts
- 5 How to Read Stock Charts for Day Trading
- 6 Frequently Asked Questions About Reading Stock Charts
- 7 Apply for the Trading Challenge
- 8 Conclusion: How to Read Stock Charts
What Is a Stock Chart?
At its most basic level, a stock chart is a visual representation of price and trading volume over time. Think back to your junior high math class when you plotted points on a graph. You had the x-axis and the y-axis…
On a stock chart, the x-axis represents time and runs left to right. The y-axis runs vertically and represents price and volume.
You should know how to read a stock table and visualize the basic chart. For the more complicated stuff, there are technical indicators.
Why Use Stock Charts?
I suppose you could ask a drummer why use drumsticks, right?
A price and volume stock chart is the most basic technical analysis of a stock. If you want to trade, you need to study charts. That means you need to be able to read a stock chart.
Basic Reasons for Using Stock Charts
- Understand the stock’s price and volume history. I consider myself a glorified history teacher. Much of the information you need to trade stocks the way I teach is on the chart. Studying historical charts can give you insight into possible future price action.
- Clearly see when a stock is primed for a big move — like a supernova or an overnight gap up on a first green day.
- Get an idea of support and resistance levels.
- Learn to recognize patterns. Patterns are a cornerstone of the strategies I teach in the Trading Challenge.
How to Read Stock Charts for Beginners
This is your “how to read stock charts for dummies” primer.
Price & Volume
Again, the y-axis on a stock chart represents price and volume. Price is typically shown as a line graph, a bar graph, or with candlesticks. Some charting software allows histogram and area graphing as well. On nearly all stock charts, volume is represented as a bar graph below the price graph.
Let’s look at some examples. I’ll explain my preferred style later in this post. I’ll also give you some links to StocksToTrade.
Here’s an example of a stock chart. Outlook Therapeutics Inc (NASDAQ: OTLK) had a nice spike on May 17, 2019. Check it out…
Again, the x-axis (left to right) represents time. The time period depends on your setting. For example, you can look at an intraday chart from the moment the market opens until it closes. Or you look at a one-year chart to see longer-term trends in price and volume.
The chart above is one day, including premarket and after-hours trading. The far right of the chart is pre-market on the next day (in this example, May 20.) Each candle on the chart represents five minutes. All charting software allows you to change the time frame of candles. The same is true of open-high-low-close (OHLC) bars or line graphs.
Chart Types and Styles
All charting software and apps allow you to choose from several time periods. Use hours, a single day, multiple days, weeks, months, or years.
Common chart types include line graphs and Heikin-Ashi candles. My favorite — and the style I use — is the candlestick chart.
To get an idea of the different chart styles, let’s look at KBLB again. Each chart below is over 10 days with a 15-minute period. Aside from changing the chart style — and the background on the line chart — this is the exact same chart.
These are all KBLB charts, broken down by Heikin-Ashi, line, bar, and candlesticks…
The chart style you use depends on how you trade and what you want to see. The information in each chart is based on the same data. But the output gives slightly different clues about possible future price action.
Each chart style has advantages and disadvantages. For example, the Heikin-Ashi candle gives a clear picture of reversals and trends. That’s because it uses a two-period averaging formula. But the averaging formula obscures certain price action — which can be a disadvantage.
I use the standard candlestick chart when I trade, and it’s what I recommend for students. First, learn your strategy and how to identify patterns. Then you can start playing with other chart styles.
Moving Average Lines
Moving average (MA) lines are a graphical representation of past price history. A 200-day simple moving average (SMA) plots a line of the average closing price for the past 200 days. The period you choose for the chart determines the period used for the moving average lines.
For more on moving averages, check out this post. It explains in much greater detail the different types of moving averages. It gives you the formula to calculate moving averages and use them as a gauge of support and resistance.
I don’t use technical indicators much when I trade. But the post I link to above shows you some moving average chart setups you can use for trading. For example, some traders use two moving averages — a slow and a fast. They watch for the lines to cross and this signals them to buy or sell.
Relative Strength Line
The relative strength index (RSI) measures losses against gains. Traders use it to determine whether a stock is overbought or oversold. Like with moving averages, most stock charting software allows you to plot an RSI line. It’s usually displayed in a separate graph below the volume bars.
For more on relative strength, read this post. It shows you how to calculate the RSI and use it to determine overbought or oversold conditions. It also explains how some traders use RSI to determine entry and exit points.
A Note About Technical Indicators
There are literally dozens of technical indicators available to you for stock analysis. Some traders love to use them. I prefer to use basic support and resistance and follow recognizable patterns.
It’s important for you to get familiar with different technical indicators. But don’t miss the proverbial forest for the trees. If you find an indicator useful or interesting, by all means — learn how to use it when you trade…
But beware of analysis paralysis! Sometimes technical indicators are in direct conflict with each other.
How to Read Stock Charts — Infographic
I know this technical stuff can make your eyes glaze over. So let’s roll it back a little bit.
This slick infographic breaks it down to basics. It clearly shows a chart’s support and resistance. When you’re able to read charts, you’ll have a better chance of figuring out what happens next.
Resources for Stock Charts
I teach my students to recognize the patterns I’ve traded successfully over the years. My favorite patterns change from time to time. I have students trading most, if not all, of the patterns I teach.
I’ve written several posts about patterns. Here’s what you should do to become familiar with patterns. First, check out the following posts on the blog:
- Penny Stock Chart Patterns (Note: this is from my free online penny stock guide. Do yourself a favor and start at the beginning.)
- First Green Day OTC: Common Patterns & Trading Tips
- 20 Candlestick Patterns You Need to Know
- Are You Taking Advantage of These 3 Bull Flag Patterns?
- Trading Breakouts: Riding the Hype in This Insane Market
Those posts have a ton of information about support, resistance, breakouts, and more. Once you read and re-read them, apply for the Trading Challenge. Get ready to work hard … and have an incredible ride finding your market stride.
Get the Right Equipment
There are lots of stock screening and charting options out there. But my favorite, by a landslide, is StocksToTrade. Designed by traders for traders, it has everything I need, all in one place. I even helped design it and I’m an investor.
I think its charts are incredible. You can choose time constraints between one minute and month to month … This lets you view price action over any time frame. The charts come with lots of economic indicators, and you can view multiple charts simultaneously.
You can also use StocksToTrade to create watchlists, scan news, and monitor tickers. It’s all accessible from your dashboard.
You can take it for a test drive with a 14-day trial for just $7. That’s less than the cost of a fast-food meal to try it for two weeks. I highly recommend you check it out.
How to Read Stock Charts for Day Trading
I made my money day trading. I trade mostly penny stocks, and day trading is all I trust most of them for. Even just overnight, holding shares of junk stocks makes me nervous.
Charts are critical for my day trading strategy. Patterns like breakouts can take place over a long period of time and tell you something about trading right now. This is why you study history.
Check out my post on dip buying morning panics. Pay attention to these. Even if the chart looks fugly on the way up, the panics are usually predictable. When the setup is right, they’re a thing of beauty.
Frequently Asked Questions About Reading Stock Charts
Like I said, this post only covers the basics. But while we’re at it, let’s get those burning questions out of the way.
How Can You Read Stock Charts on Robinhood?
The better question is how to read stock charts — period. Focus on your education before jumping right into trading. And do your research to find the broker that best fits your needs. I’d be leery of any broker that gamifies trading...
How Do You Read the Stock Market Index?
There are charts for indexes too. While the S&P 500 won’t tell ya much about penny stocks, it’s still helpful to see the general market trends. This can tell you a lot about which sectors to watch and the volatility in the market.
How Do You Read Charts on Stock Apps?
I don’t recommend using apps for planning trades … And I think the best tool for charts is StocksToTrade because I helped design it for the volatile low-priced stocks I love to trade!
How Do You Read Stock Volume Charts?
Unlike price, volume is pretty uniform in charts. It’s almost always shown as a histogram. This is the bar graph that’s just under the price graph. Check the markings on the borders for what the lines signify.
Apply for the Trading Challenge
I’ve mentioned the Trading Challenge a few times in this post. If you’re getting serious about trading, you should apply today.
The majority of traders fail. Why? I think it’s a matter of lack of preparation. That’s where I want to help you.
The Challenge is where my top students built their knowledge. You can take advantage of the same things they did — often right alongside them. You can access live webinars, the Challenge chat room, and so much more. So it’s up to you to set a learning schedule that fits your life and get to work.
Reading stock charts is only the beginning. Keep in mind, I’m not looking for more students just to have more students. I’m looking for students who are willing to put in the time and effort. If that’s not you, don’t bother.
If it is you … get on it. Don’t put off until tomorrow what you can do today. Start your application process here.
Conclusion: How to Read Stock Charts
When I got into penny stocks, I spent a few weeks simply watching stocks trade. It was fascinating to discover there were certain patterns. Not only were they recognizable to me, but during the dot-com bubble, I found them to be predictable.
Now, more than 20 years later, I still see many of the same patterns. As sectors come into play, so the patterns appear. When a sector goes out of favor, the patterns play out less often.
This is the most important piece of the puzzle, but it’s only one piece of the puzzle. If you’re new to this, check out my FREE penny stock guide next.
And if you want to get up to speed quickly, I’ve designed a 30-Day Bootcamp for just that purpose.
Trading is like learning a language. Take your time, learn your ABCs … and maybe one day you’ll be writing Shakespeare. Or at least some good knock-knock jokes.
What kind of charts do you use and why? What did you learn in this post that you can use right away? Leave a comment! I love to hear from all my readers.