5 Tips for Analyzing Stock Charts

Learning how to invest is one thing, right? Then, while you’re learning, someone pulls out stock charts and you feel like you’re back to square one. If you never learned about analyzing stock charts (just like the rest of us who didn’t learn yet somehow learned Hot Cross Buns on the recorder), don’t worry. 

Basically, you’ll want to take it slow. Don't try to look at too much at once. Break down the chart into smaller increments of time so that it’s easier to see what is going on in each part of the chart. It also helps to have an idea about which indicators will help you answer specific questions (such as if there are any trends or dips).

Aside from that, what else is there to know? Unfortunately, quite a bit. But, we’re here to walk you through it nice and slow.

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Understanding the Basics of a Stock Chart

Okay, so let’s start by answering the question that’s most likely on everyone’s minds. What is a stock chart? Basically, it’s a graph. The graph shows you how the price of the specific stock has fluctuated up and down over time. You get to choose what period of time you’re looking at, which is usually a period of a few months or up to five or ten years.

Really, what a stock chart shows you is the historic and current performance of a stock so that you can (somewhat) gauge its future expected performance. 

Why does this matter? A stock chart is a shorthand description of what all the other investors in this particular asset have been doing. 

Stocks go up when more want to buy than sell; they go down when more people want to sell than buy. So, what’s the current state of this investment that you’re considering making? Is everyone hopeful or fearful? A quick glance at a stock chart will reveal the answer to that question.

Where can you find these stock charts? As a beginner, we suggest starting by looking on Wealth Stack or even Google or Yahoo Finance. The charts that come up are a bit easier to read and don’t feature as much complex information as other stock charts you can find in places such as Bloomberg.

Let’s take Tesla (TSLA), for example. You’re going to:

  • Google “TSLA”
  • Click on the “Finance” tab at the top (right next to “News,” “Images,” etc.)

It should look like this once you click to expand the full view of the stock chart:

Or, even better, download Wealth Stack and start browsing through the stock charts there. You’ll click on the Invest tab and then search for TSLA. It should look like this at the top. Scroll to the bottom and you’ll see the information listed in this second screenshot here:

Wealth Stack Investment App

Cool! Now you’ve technically read your first stock chart. We’re not done yet, though. See those terms to the right? Those are terms you’ll need to understand in order to understand what the chart is showing you.

Here is a basic rundown of the various different terms you see here:

  • Day Range: The range within which the stock has increased or decreased over the period of a full day.
  • Year Range: The range within which the stock has increased or decreased over the period of a full year.
  • Market Cap: This is short for "market capitalization,” which refers to the total value of a publicly traded company's shares.
  • Volume: This refers to the trading volume. Because we’ve got the chart to show a full year of information, this means that 22.37 million shares were traded over the course of the year that’s shown here.
  • P/E Ratio: This is the price-to-earnings ratio. This measures a company’s current share price relative to its per-share earnings. You can use this to help you determine the real market value of a stock compared to what the company earns (a lower P/E ratio is better).

*IMPORTANT: These aren’t the only stats you need to look at when analyzing a stock (not by far!). However, these are some of the most basic terms and metrics that you need to understand first when learning to invest as a beginner.

What Are the Different Types of Stock Charts?

The most basic types of stock charts you’ll find when you really start to learn how to properly analyze stocks are:

  • Line chart
  • Candlestick chart
  • Renko chart
  • Point and figure chart

Which stock chart is the best to use? It really depends on what you’re looking at. The one we showed you above is a basic line chart, which helps provide you with an overview of general metrics in a way that’s easy to understand.

A candlestick chart is also used to show how a market performed over a selected period of days, weeks, or months. However, each day is represented by the shadows of the "candlesticks." Renko charts, on the other hand, are used more to measure price changes. You’ll see bricks on the charts that are indicators of market trends.

Finally, point and figure charts are different in that they don’t display changes in a stock price over time. Instead, the chart plots the price against changes in direction by using Xs to indicate price increases and Os to indicate price decreases.

What to Look for in a Stock Chart

Learn How to Read Candlestick Charts

Candlestick charts can be helpful in analyzing stocks as long as you know how to read them correctly. InvestorsObserver created a helpful image guide that explains the candlesticks quite clearly:

Analyzing Stock Charts Candlestick

Basically, in a candlestick chart, you have the body and the wicks. The body shows the price range that occurs throughout a period of time for the opening and closing price. If the body is green, it indicates an increase and if it’s red it indicates a decrease in the overall price.

The wicks are a visual representation of the final opening or closing price (depending if it’s the top or bottom wick) compared to the original price. If the top wick is short on the candlestick to the left above, for example, it indicates the close was near the high price for that time period.

Consider Long-Term and Short-Term Charts

When analyzing stock charts, it’s best to look at both long-term and short-term charts. Although, we will say that it’s best not to use long-term charts as a base for making any investment decisions

A long-term chart can help you sort of suss out the financial health of the company itself (if you’re looking at the right metrics). This can be helpful in projecting long-term price expectations and can help provide a sense of future stock price fluctuations up or down depending on future catalysts.

What does that mean? It’s quite normal to see companies appreciate or decline upwards of 20% on positive or negative news. Wouldn’t it be nice to know before you make your investment that in three of the last four earnings periods the stock has declined more than 15%? That sounds especially helpful if you’re buying the stock close to the next earnings release date (companies release earnings every three months).

When you want to analyze the correct timing of a buy or sell, however, it’s best to learn to look at a short-term stock chart. In fact, we’d suggest starting by looking at a long-term chart of the stock you’re analyzing. Then, work down to a short-term chart that breaks down more recent, specific metrics that are important to your analysis. 

The long-term chart gives you an overall feel for the business performance and general trends; the short-term chart helps you analyze, based on the overall performance, when you should look to invest.

Look at the Volume of Trading

Simply put, looking at trading volume can help you identify momentum that helps you confirm a trend. Generally, if trading volume increases, prices will move in the same direction that they’ve been moving. 

In general, a high trading volume is a positive sign. Good stocks tend to have high trading volumes, and that reduces liquidity risk. However, don’t base your investment decisions on this alone. Just because a lot of people are trading a certain stock doesn’t mean it’s a good investment. Take GameStop, for example (which we go more into detail here).

How to Use Your Technical Analysis to Make Better Trading Decisions

There’s a lot that we didn’t cover in this short introduction article to analyzing stock charts. It’s a complex topic that’s best understood if you learn it all bit by bit. So, we’d recommend that you continue your learnings over on the Wealth Stack app.

A big part of becoming an expert investor is simply learning how to understand metrics, identify trends, and invest at the right time. Patience is key, too, so stick with us here. Download the Wealth Stack app for free here to start learning today.

You’ll get access to tons of free video content that makes learning how to invest as a beginner way easier. Then, once you feel confident, start trading straight from the app!