How To Read Stock Charts And Know What Stocks Are Doing
Stock charts are the tools that a trader or investor uses to help him or her time the markets. They are like a doctor's instrument that helps them know the health of each stock. If you have look over the shoulders of a trader you will notice the charts and the different lines that look so confusing. But to the trader, the charts, lines and indicators tell a big story about the health of the stock, index or markets that he or she is analyzing.
Trust me, you can make money just by studying charts. No need to look at economic stuff or balance sheet or stuff.
That's because:
Below is what a stock chart looks like.
Trust me, you can make money just by studying charts. No need to look at economic stuff or balance sheet or stuff.
That's because:
- Price and volume represent the actions of market participants.
- They tell of the greed and fear of traders and investors and how you can take advantage of them
- There are tons of patterns that repeat themselves over and over again today, tomorrow and 100 years to come
- In other words, history repeats itself in stocks and if you study history, you will be able to know what will likely happen
Below is what a stock chart looks like.
Do not be overwhelmed by the amount of information that you can see on the chart. Basically a stock chart consists of
I tend to use only the moving averages (MAs) and stochastics and MACD.
That's all I use because the more indicators you use, the more confusing it can be. In the chart above, the red color line represents the 20 MA, the blue line represents the 50 MA and the yellow line represents the 200 MA. The moving average or MA is an average price of the period chosen. So, for example the 200 MA tells us the average price over 200 trading periods.
I use the MAs to tell me the trend of the stock. If the stock is above the 20 MA, it means the short term trend is bullish, if the stock is above its 50 MA, then the stock is medium term bullish, if the stock is above its 200 MA, then the stock is long term bullish. That is just a rough determination of the health of stock.
So, in the chart above, the SPY is long term and medium term bullish but is short term beginning to look not so good as it recently traded below the 20 MA. This works well when a stock is trending, however there are times that the stock is moving sideways and thus the MAs do not work very well to tell me the health of the stock.
So oscillators such as stochastics and MACD are used.
- Price
- Volume
- Indicators
I tend to use only the moving averages (MAs) and stochastics and MACD.
That's all I use because the more indicators you use, the more confusing it can be. In the chart above, the red color line represents the 20 MA, the blue line represents the 50 MA and the yellow line represents the 200 MA. The moving average or MA is an average price of the period chosen. So, for example the 200 MA tells us the average price over 200 trading periods.
I use the MAs to tell me the trend of the stock. If the stock is above the 20 MA, it means the short term trend is bullish, if the stock is above its 50 MA, then the stock is medium term bullish, if the stock is above its 200 MA, then the stock is long term bullish. That is just a rough determination of the health of stock.
So, in the chart above, the SPY is long term and medium term bullish but is short term beginning to look not so good as it recently traded below the 20 MA. This works well when a stock is trending, however there are times that the stock is moving sideways and thus the MAs do not work very well to tell me the health of the stock.
So oscillators such as stochastics and MACD are used.
The stock chart above shows the daily chart of the Biotech sector etf IBB. You can see from February to July it traded sideways. At that time, the MAs were basically useless. If you follow them the stock will give many conflicting signals. But if you use the oscillators like Stochastics and MACD, they will tell you when the IBB was overbought or oversold.
So, in summary, you use the MAs when the stock is trending up or down and you use the oscillators when the stock is trading sideways. That explains why indicators don't work all the time. The trader needs to be flexible and use the right tools at different environments. Just like a good chef will use different knives and pots to cook different things. You can't just use the same thing again and again. Thankfully, stocks only do 2 things. They are either trending or not trending (move sideways).
- When the stochastic show an overbought signal, the IBB soon decline.
- When the stochastics show an oversold signal, the IBB soon rose
So, in summary, you use the MAs when the stock is trending up or down and you use the oscillators when the stock is trading sideways. That explains why indicators don't work all the time. The trader needs to be flexible and use the right tools at different environments. Just like a good chef will use different knives and pots to cook different things. You can't just use the same thing again and again. Thankfully, stocks only do 2 things. They are either trending or not trending (move sideways).
The above chart shows the 60 min chart of SPY.
The way to interpret things are the same in the 60 min charts as well as the daily charts. In this case which just shift our timeframe of the things that are happening. So if you were to look at the weekly charts, you will see things in a very long term perspective.
Hope this article helps explain more about how to interpret stock charts. My daily Stock Market Analysis uses all these settings. Different traders will use different settings but one thing is the same, they help the trader determine the health of a stock. In order to understand more of oscillators and indicators, I recommend that you do a Google search on these topics:
The way to interpret things are the same in the 60 min charts as well as the daily charts. In this case which just shift our timeframe of the things that are happening. So if you were to look at the weekly charts, you will see things in a very long term perspective.
Hope this article helps explain more about how to interpret stock charts. My daily Stock Market Analysis uses all these settings. Different traders will use different settings but one thing is the same, they help the trader determine the health of a stock. In order to understand more of oscillators and indicators, I recommend that you do a Google search on these topics:
- Introduction to moving averages
- Introduction to Japanese candlesticks
- Introduction to stochastics
- Introduction to MACD
