Understanding Stock Charts – A Few Basic Tips

Understanding Stock Charts – A Few Basic Tips

Stock charts can render an wealth of data if you realize what to look for. Stock charts also come in many different forms, styles, and types, but a few fundamental charting skills can be used globally across all charts. In addition, when made use of in conjunction with other stock indicators these basic charting skills are able to help you greatly improve your trading results.

The majority of the most important pieces of information that can regularly be determined from charts are resistance levels. Resistance levels are price levels that a stock has a tough time passing through. The bottom resistance is named a floor while the upper resistance is called a ceiling. Essentially, what happens at a floor (bottom resistance) is buyers enter the market around the floor price to stabilize the price and possibly drive the cost contingency plan. When a regular is reaching its ceiling, sellers enter the marketplace stopping the upward momentum and perchance drive the stock price backpedal. The best method to spot resistance levels on a regular chart is to find prices where the stock moves sideways. For example, if a stock is trading around 35 and then trades down to 30 but then begins to move sideways at 30 and eventually heads back off in price, then 30 is probably a price floor. The more times a resistance level is tested, the stronger it becomes. Although, if a resistance level is broken it usually becomes resistance in the opposite direction. As an example, if the stock remarked above broke through its price floor of 30 then the price floor would become the price ceiling. Keep in mind that resistance levels are normally price ranges not a specific stock price.

Another essential feature of stock charts is volume ( the amount of shares traded on a daily basis). Most stock charts will show the volume of shares traded along the bottom of the chart. Search for more than normal trading activity. If a stock is trading higher on high volume it is much more probable to carry on. All the same, if a stock is trading higher on low volume, it may be a signal of uncertainty and the gains can be temporary. Without the confirmation of volume it is very difficult to be sure of any price move or new trend.

A third essential chart feature is a gap. A gap is when a stock “jumps” up or down leaving a blank area on the chart. For example, if a stock closed the prior day at $35 but then opened the following day at $39, this would be a gap up. In this example the gap will become a resistance floor. Nonetheless, if the gap is penetrated, it will frequently fill the entire gap or close the blank space before resuming its trend. Once the gap has been closed it loses much of its significance on stock charts.

When using stock charts, you should think about them as a basis for information. Before trading you should thinking about using other indicators to confirm the validity of your observations. Also, keep in mind that using stock charts can be a helpful tool but stock charts use historical information and future price movements may differ. Still, most active traders depend on stock charts and indicators to make their investment decisions.


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