Stock Charts
Stock charts are a primary tool investors and traders use to analyze stock performance.
As investors, we have many tools at our disposal for identifying good investments. However, stock charts are our first choice for technically analyzing past stock performance to help us make reliable predictions about the future.
The problem is, the first time you see a stock chart, it might look like a confusing mess – or a rejected piece of modern art. But as with everything else about investing, it’s not that complicated once we break it down into the basic components.
We’ll cover everything you need to know to get started with stock market charts, explain the basic concepts, identify common chart terms, types, and patterns, and go over how to set up charts in your portfolio tracker.
Learn More About Stock Charts
What is a Stock Chart?
A stock chart is a visual representation of a stock’s price over time. Other elements can be added, but price over time is the most fundamental component. We use charts to analyze past performance and identify trends and patterns to make effective predictions about the future.
For example, say a stock you own suddenly dips in price. What does it mean? Is the stock tanking, or is it just a minor correction? We can put this price drop in context by analyzing past performance and looking for patterns.
It could be time to sell, or it could be time to buy more at a bargain price. Charts provide the context we need to make sense of market activity.
But remember, past results are no indicator of future performance. Charts are just part of the overall analysis required for picking stocks and succeeding as an investor.
Stock Market Charts Breakdown
First, let’s look at a stock chart’s individual components. We’ll look at the features, common terms, and basic indicators usually presented along with stock charts. Some of this might seem obvious, but it’s always good to start at the beginning.
Basic Features
Stock charts will always be rectangular with a time axis, a price axis, and a legend.
Time Axis
The horizontal axis (X axis) on the base of the rectangle represents time. The chart period (or date range) is dynamic and can be set for a period of minutes, years, and everything in between, depending on what kind of analysis you’re doing.
Price Axis
The vertical axis (Y axis) will usually be on the right side of the rectangle and always represents price. This section is also dynamic, shifting in size to accommodate the price variance during the chart period.
Legend
The legend provides key information about the stock. The information displayed here will vary based on the chart system you’re using, what time period you’re analyzing, and what additional features and indicators you have enabled.
Basic Terms
We need to know a few terms and concepts to understand the information displayed in a stock chart. There’s an almost endless list of ratios, indicators, and measurements that can show up on a chart, but the following ones are what we need to know to get started.
Open & Close
The open price is the starting price of the stock at the beginning of the trading day, and the close price is the final sale price of the stock before the end of the trading day. You might also see previous close, which refers to yesterday’s close price.
High & Low
These are intraday price extremes. The high is the highest price reached during the trading day, and the low is the lowest price reached during the trading day.
52-Week High & Low
Same idea as in High & Low, but it indicates the highs and lows reached during the previous 52-week period. This provides a long-term context for current prices.
Moving Average
Represents the average price of the stock for a specific period, providing historical context for the current price.
Volume
Refers to the number of shares being traded during a time period. Usually, it refers to the volume of trades occurring on the current day, but you might also see the average volume of shares traded over a broader time frame.
Basic Indicators
Stock charts are usually presented with additional amplifying data. There are a good number of indicators, but the following are the basic ones:
Bid & Ask
Intraday indicators of current buy and sell prices. The bid is the current price a market sell order will be filled at. The ask is the current price a market buy order will be filled at. Typically, the ask price is higher than the bid price.
Dividend
Dividend yield is the amount paid to shareholders per dividend payment. The ex-dividend date is the last day of a specific period where owning the stock entitles you to a dividend payment.
Market Cap
Market Capitalization (or Mkt Cap) refers to how much a company is worth. You can determine the value by multiplying the number of shares by the current stock price.
Earning Dates
This refers to when a company will release quarterly financial information, which can have a significant effect on stock prices. You can usually spot the earnings date on a chart because the price will often fall or rise based on the results.
EPS
Earnings per share is a measure of company profitability. EPS is determined by dividing earnings by the number of shares available. The higher the number, the more profitable the company is.
PE Ratio
You usually use price to earnings ratio to determine if a company is over or undervalued. You calculate the PE ratio by dividing the current stock price by the EPS. The higher the PE ratio, the more a company might be overvalued by the market.
TTM
It refers to trailing twelve months, which indicates that the information presented is based on data from the previous year. EPS and PE ratio are often presented in this context rather than including irrelevant data from years or decades ago.
Common Types of Stock Charts
The following are the three most common stock charts you will encounter in order of how much information and detail each provides:
Line Chart
This is the most common type of chart you will see and is the most useful to long-term investors. The line chart is a continuous line connecting daily close prices over time.
However, the line chart offers limited value for short-term traders because it doesn’t include intraday trading details.
Bar Chart
The bar chart adds additional data to help investors identify short-term trends and volatility.
A bar chart is characterized by a vertical line connecting the high and low of the day and two short horizontal lines indicating the open and close. This is also called an OLHC (Open, Low, High, Close) chart.
Candlestick Chart
The candlestick chart is composed of a rectangular body with the top and bottom indicating the open or close prices.
“Wicks” protruding from the top and bottom indicate the high and low, respectively. If the stock closed up, the body will be green or white. If the stock closed down, the body will be red or black.
Basic Technical Analysis Concepts
Stock charts are a fundamental component of technical analysis, which is the process of identifying objective technical indicators that might suggest future stock performance. Here are a few of the most basic concepts we need to know:
Support & Resistance
These are psychological barriers or inflection points that seem to bracket a stock price for a period of time. The support line represents the price floor, and the resistance line represents the price ceiling. Higher trading volume is usually required to break through support or resistance.
Uptrend & Downtrend
If the stock price chart is clearly moving in one direction or the other, that’s called a trend. If the trend is going up, it’s called an uptrend. If the trend is going down, that’s called a downtrend.
Continuation & Reversal
Certain stock chart patterns can indicate that prices will continue on the current trend (continuation pattern), while other patterns indicate the trend will reverse (reversal pattern). We will cover patterns in more detail below.
Time & Scale
Patterns that emerge and develop over a longer period (days and months) are generally more durable and reliable than patterns that emerge on intraday time scales (minutes and hours).
Volatility
Larger and more frequent price changes indicate higher volatility, which usually means larger price moves once support or resistance are broken.
Common Chart Patterns
While stock charts can take any number of shapes and often defy expectation, charts sometimes present specific patterns that indicate either continuation or reversal of a trend. Here are some of the most common stock chart patterns:
Continuation Patterns
These patterns suggest the current trend will continue:
Symmetrical Triangle
Prices oscillate with lower highs and higher lows before converging on a single point, then breaking out in a sudden price change. If you add trend lines to the chart, it looks like a triangle pointing to the right.
Ascending Triangle
A triangle with a horizontal top and angled bottom of progressively higher lows, indicating a continuation of an uptrend.
Descending Triangle
A triangle with a horizontal bottom and angled top of progressively lower highs, indicating a continuation of a downtrend.
Pennant
Similar to a symmetrical triangle, but with smaller price fluctuations. The shape looks like a pennant flag pointing right.
Bullish Flag
Two parallel trend lines angled upward, indicating a bullish continuation. The difference between the high and low remains the same as the price increases.
Bearish Flag
Opposite of the bullish flag, with two parallel trend lines pointing downward to indicate a bearish continuation.
Rising Wedge
Similar to an ascending triangle, except both lines point upward, with the top line taking a more extreme angle. This is a stronger bullish continuation signal.
Falling Wedge
Opposite of the rising wedge, as both lines point downward to strongly indicate a bearish continuation.
Rectangle
Parallel support and resistance lines indicate a pause in the trend and price stagnation as bulls and bears battle to a standstill.
Cup & Handle
The stock price will gradually dip and then rise (the cup), followed by a small bearish flag (the handle). This pattern indicates strong support. The cup and handle can also appear flipped upside down, indicating strong resistance.
Reversal Patterns
These patterns suggest the current trend will reverse:
Head & Shoulders
Characterized by a central peak flanked by two smaller peaks, which looks like a head flanked by two shoulders. Indicates a bearish reversal.
Double Tops
The price will hit the same high twice, which indicates possible resistance at that price level and an impending bearish reversal.
Double Bottoms
The opposite of double tops, the price will hit the same low twice, indicating possible support and an impending bullish reversal.
Triple Top Reversal
Similar to a double top, but the price makes three attempts to break through resistance rather than two. This indicates particularly strong resistance and a likely bearish reversal.
Triple Bottom Reversal
The opposite of the triple top, indicating strong support and a likely bullish reversal.
Setting Up Stock Charts
Now that we understand the details of stock charts, we can take a look at how to set up charts in your stock tracking software of choice. In this case, we’ll use our StockMarketEye portfolio tracking software.
- Pick a Stock: From the main screen, choose a stock or portfolio you want to chart and analyze. When you click on the symbol, the chart will automatically appear.
- Set the Date Range: In the upper left corner of the chart window, choose one of the preset date ranges to quickly see the chart period to analyze. You can also set a specific date range using the custom date range tool in the upper right corner.
- Set the Chart Type: Above the custom date range tool, choose the settings dropdown menu. Choose charting settings, then style. You can pick between line, candlestick, OHLC (bar), and other variants.
- Add Volume to the Chart: In the same menu, choose volume, then choose standard. Volume measurements will now appear along the bottom edge of your chart.
- Continue to Add Analytical Tools: The previous steps will help you set up a basic chart, but StockMarketEye offers a variety of advanced tools to help you fine-tune your analysis. Feel free to try them out – you can’t break it.
Start Applying Your Stock Charts Knowledge
We hope you have a better idea about what stock charts are, what they mean, and how they work. There’s a lot more to unpack, but you should now have a good idea of where to begin. We’ll continue to put out more sources explaining all aspects of stock charts, so stay tuned for more great content from StockMarketEye.
If you’re interested in diving into stock charts and technical analysis, give our stock charting software a try. It includes powerful charting tools to help you master your stock analysis skills. We offer a 30-day, no-risk trial, so you have plenty of time to figure out if our software is right for you.