LEVEL: BEGINNER
When analyzing stocks, one of the tools investors use is stock charts, which can help one decide if the investment is a good decision or not. It may also help with timing of the trade, or the decision to hold off on a trade in the near term.
Learning how to read a stock chart is a valuable tool, and one that investors should learn so that they can better execute their trading strategies and/or individual trades.
One of the most important things is to begin to read charts by themselves. The actual bars on the charts themselves are one of many indicators that you can use when deciding on the timing of a stock purchase or sale.
SPY Weekly Chart
Click on image to zoom
First, ask yourself some questions like: What has happened here? What has the past shown you? What does this mean for the future? How do all of your observations line up to one conclusion? It may be helpful to write down your answers on paper, so you can document your analysis.
Start to ask yourself: what tendencies am I seeing in this chart? How stable is the directionality? How long is the time horizon of the chart, and how are different timelines different? Writing all of your observations down will help you read the charts better as you formulate your opinion. Keeping a log of your observations will help you paint the technical picture of the stock. As you go through this exercise try to keep it as simple as possible.
There are other things that you can do such as compare charts that are in the same sector/asset class, or compare the chart against a stock index such as the S&P. You can also look at Daily Charts, Monthly Charts, and charts covering other time periods as well.
After you have come up with your analysis without indicators, you can then add indicators to your chart to further your analysis. Indicators such as Volume and MACD (for more on MACD, read this article) can help you understand the flows/trend of the chart, and just how actionable the investment idea is. They may also help you time the trade as well.
SPY Weekly Chart with Moving Average and Volume Indicators:
Click on image to zoom
Learning how to read a chart takes time, and after you’ve mastered the art, it takes a lot of time reading a chart before knowing what action to take. As you develop and document your analysis, you will hopefully being to recognize chart patterns better. This will help you with your decision making process when thinking of executing a trade, and hopefully the area where you would like to execute the trade as well.