We can flick through the latest Vogue and now exactly what looks good, unfortunately we’re not born with that innate ability to read trading charts. As much as we ladies pride ourselves on being right all the time, we must come to the conclusion that we need to do a little studying on trading charts!
Luckily, stock trading is not a guessing game. There are charts that we can utilise to give us helpful information. Today we will discuss the basics on how to read trading charts and get you started towards reaching your successful trading goals.
That new pair of sunglasses or holiday in the sun is one step closer to being yours! Let’s get started!
Why we use charts
Ok, I admit, I did not do well when it came to reading basic charts in school. It just did not interest me then. I hated math. Especially math that involved charts.
However, when it comes to trading stocks, we have to put a little interest into them. I mean, money is our common goal and motivation to want to learn more, right?
We can’t earn if we don’t learn!
The first thing we have to understand about charts is, they have a story to tell. Think of it as reading a juicy novella on a long-time frame, or latest celeb gossip on a short time frame. If you look back over a celeb saga it is like zooming out on a chart to “see” the bigger picture on the story. As we read the charts, we “see” the stock’s history and suggestions into its future.
You will “see” the stock finding floors of support to continue climbing or if they are bumping their heads like two guys over a game of football. This will essentially teach you how to interpret the price and volume over time, telling you when to buy, hold, or sell.
As prices go up and down reading the charts will lower your risk of loss and increases your chances of making money! Wouldn’t it be great if we could read men like charts, so we know what we are getting into first?
Wouldn’t it be great if we could read men like charts, so we know what we are getting into first?
When trading stocks, if you don’t use charts, you are practically setting yourself up on a blind date. Except in this case, instead of having your best friend fake an emergency call to get you out of it, you stand to lose your investment. We are in this to make money, not lose!
So, ladies, let’s plan a night in to get our studying on! We maybe can’t read the men we date, but we can read the stocks! Many traders rely on IBD charts, due to the fact they are simple and do not cram an overwhelmingly unnecessary amount of information. You can think of IBD charts as the “cheat sheet” in the chart reading department. They contain the key elements you need to review and analyse your potential stocks.
Just as we love to scour the local sales paper or online retailers for bargains, studying and reading charts for stock prices is really no different! Let’s review how to read the price area of the charts.
When looking at the price area of the chart, you will see the price changes that occur daily. Just as petrol (gas if you’re in America) prices go up and down almost daily, so do stock prices.
You will notice the vertical bars that appear on the chart, that shows what the shares price range is for that day. It may be one price one day and a completely different price the next! That small dash ($1633 on this example) that intersects horizontally inside the price bar shows what the price currently is for that stock) or where that stock closed at, at the end of the day if after trading hours).
There are two colours that the price bar can be, red or blue. Depending on what colour the price bar is, will tell you whether a stock closed up, which is blue, or down, obviously red. Some places have green instead of blue, it means the same thing 😉
So taking different candle types you can see which days are more volatile and which days the market moved up or down. The chart shows a few examples:
- A violent selling day with big price reduction
- A day with large trading range during the day, but actual open and close close together (this was actually followed the next day by lots of selling)
- A day with strong buying performance (which followed a large sell day, and a reversal seen by the large trading range and close open and open)
- A day which was positive for buyers, but with very limited movement in price
It is important to read both daily and weekly charts for the prices, as they fluctuate and over time will show patterns. You will be able to tell if the price is a normal change or if there is a true shift in trend. That information will prove to be golden when it comes to deciding when the best time to buy or sell is. It will also tell you when it is time to be patient and hold tight.
Sometimes ladies we just need to listen… listen to what the chart is telling us 🙂
While we ladies don’t like being told what to do, the price area of the charts will help you tremendously if you just “listen” to what it is telling you.
When trading or investing in stocks, it is important to understand what market cap is and why it is important to you, as an investor.
Market cap (short for market capitalization) measures what a company’s worth is on the open market. Basically, it is the part of the novella that gives all the juicy insight! You see what the value of all of the company’s stocks are. It also tells what the market’s perception of its future prospects are because it shows what other investors are willing to pay for its stocks.
When they say size doesn’t matter, they certainly are not referring to stock trading.
You, as an investor are able to see the size of a company compared to others. When they say size doesn’t matter, they certainly are not referring to stock trading, because size matters and market cap helps you see the size before you buy!
How is the market cap calculated? If you’re like me, you want to know how these things are determined. Market cap is calculated by multiplying the price of a stock by its total number of outstanding shares.
Ok, let’s break that down a little further. If a company has 20 million shares that are selling for fifty dollars per share ($50), the market cap for that company would be $1 billion.
20 million shares x $50 each = $1 billion
Total number of shares x market price for each share = market cap
This concept can be thought of like purse sizes. Large cap companies are usually large and have higher market values. It actually poses a lesser risk due to the fact there is less potential of aggressive growth or decline (and less volatility). This of this like a classic Hermes. The brand can’t get much more established at the high end (low growth potential) but it also is unlikely to crash and disappear quickly unless have a big disaster (lower risk).
Mid-cap companies have a slightly lower market value and pose a lesser risk than small-cap companies but also have more room for growth than large-cap companies. By now I’m sure you can guess, small-cap companies are a greater risk for investment, have lower market values and can be quite volatile when it comes to growth.
This could be a new handbag designer from nowhere that all of the celebs start to wear one season, but they fail to have another good collection and almost disappear overnight. Small caps can do the same, grow quick and crash quickly which makes them have higher risk and return. If they have something really unique, they may also stick around and be hugely successful making incredible returns for investors and traders.
And when trading, more volatility means more risk and more opportunity.
As with any new technique we learn in life, practice and patience will help you understand better. This concept is not as complicated or intimidating as it may seem on paper, so do not be discouraged if it takes you a few tries to grasp the concept! It took me more than a few, myself!
Just like we read the label on the latest hair products for max volume, we must read the charts for trading volume as well! When you read trading charts, the trading volume is the number of shares traded in a particular security or even the entire market during a certain period of time. In other words, every time you buy or sell a share of stock, it is considered as volume. So even if a share is bought instead of sold, volume will increase either way.
As an example, chart shows volume picking up building momentum as the price starts to drop. On the other hand volume is decreasing throughout the price recovery.
Wouldn’t it be nice if the volume in our hair increased even if we used the cheaper products?
Although tracking the volume on stocks takes quite a bit of practice, once you get it down, you have an overall advantage at obtaining profits from your investments!
How to read a trend line
In today’s society, everything is based on trends! From the way we style our hair to the clothes we buy to wear, trends are everywhere, and the stock market is no exception.
From the way we style our hair to the clothes we buy to wear, trends are everywhere, and the stock market is no exception.
Trend lines on a chart connect different price points together. Reading the trend lines can help you spot the current trends and also help you be able to get a better idea of what their prices for a stock will be. A mere glimpse into the future, if you will!
A downward sloping trendline suggests that the share has more participants willing to sell it, than to buy it. This means for you as a trader or investor, it may not be a great idea to hold a long position. Gaining on a downward trend is not very likely (unless you have shorted the market), so if you see it moving in the downward direction, treat it like a mama’s boy, and get out of there! On the opposite side, if the trendline is going upward, that suggests that the demand is greater, usually resulting in an increase in prices and more room for profit!
Support and resistance
I am a very strategic person. I like to have a plan that is well thought out and lowers my risk of loss. I hate taking a loss but with the stock market, it can happen. However, if you learn where the areas of support and resistance are, you can significantly lower your chances of taking a loss. Support is the downtrends best friend. During a downtrend, support is the price range that the trend is expected to pause or bounce due to demand. Support basically comes in and gives the downward trend a break.
A support level is like giving your bestie a confidence boost.
A resistance level is like keeping their ego in check.
Think of it like picking a friend up. If one of your besties is having a hard time, whenever she gets low you stop her getting any lower and give her confidence boost. This is like trading support. Likewise, if someone is getting carried away and needs a reality check, you stop them getting too far ahead of themselves. And this is like resistance.
The support line is formed by the decrease in prices for a share and the increase in demand.
On the contrary, a resistance area is formed when the prices increase on a share, but sellers increase at that level.
Support and resistance occur in the same place, so it looks like a pivot area. Think of this as an area where the direction of the price often changes. You can see in the above example at least 6 times where the price changes direction at this level.
So this means support and resistance levels are great times to trade as movements in either direction present an opportunity.
I’m going to zoom in a bit more so you can see how they can also help to tell a story. At the price approach the resistance level first of all, it went through it with the next day having a tight open and close (but big in day movement). The next day the price jumped up above the resistance level and retested it from above as support. Yet, once again it broke through, this time with a volatile red candle. Buyers jumped in the next day with a strong buy day (green candle), but at the resistance level it failed to break through and got rejected. Resulting in two huge days selling and price declines.
Knowing these areas can give you valuable insight when it comes to deciding to enter or exit a trade. Once these levels bring prices to a halt, you can nearly “see” what direction the prices will go. This will help you determine if you should possibly create a stop-loss order, close with a small loss, or even enter into a trade.
It is important to remember, there are several areas of support and resistance within a share. Once it reaches one level, it will either bounce away from the level or the price level will be violated like yesterday’s speed limit and continue until it arrives at the next level of support and resistance.
Prices tend to fluctuate within the stock market, just like prices of your airline tickets. This can get confusing when you are trying to determine the trend a share may be on. Moving averages help to filter some of the small price fluctuations out. There are two commonly used moving averages that you can use to determine areas of support and resistance and the direction of the trend.
Simple moving average reminds me of being in school. This is just a basic average over certain periods of time. There is also exponential moving average (EMA), this average gives more weight to the recent price fluctuations. Depending on your strategy and how you want to view it, will determine the moving average you will utilise.
Moving averages can also act as support and resistance levels. In the chart above you’ll see numerous times where the EMA was a pivot area with price bouncing off it. By watching EMAs, you’ll see that more often than not the price is guided by it, as opposed to crossing over it. This means that it is great to trade the trend in one direction – and when it crosses over look for a entry in the other direction.
Time (daily vs weekly)
Ok, now that we have discussed the basics, what chart should we use to do our research?
There are two different charts you can utilise: daily and/or weekly. Use them both!
They both have very different information but very important.
A daily chart will give you a more time-specific view of the action, like at the opening of the day. These charts can also help you decide as to what action you should take with your share. It is important to not get too overwhelmed with these charts because they can be very volatile at times, due to small price fluctuations.
Whereas, a weekly chart will smooth out some of the roughness from the small fluctuations in price and give you a more grounded view of the underlying trend. While the main point of focus is the underlying trend, it is important to keep up with minor price fluctuations because they could be signalling a shift in trend.
Using both daily and weekly charts will help keep you current and lessen your risk of loss!