Why You Need to Learn How to Read Stock Charts (for Beginners)

  • January 24, 2018

Learn how to read stock charts for beginners in our video below.

How to Read Stock Charts for Beginners

  • Let's talk about how to read stock charts successfully. When new investors or traders first begin, the types of charts that people on social media share can be great but overwhelming to read. They seem to show so much, yet understanding what they are trying to show can be difficult at first. This is because you don't have a good foundation on reading them...yet. We are here to change that for you. Seasoned traders charts aren't as simple as the charts being shared on CNBC or your local news. There is a lot more to them. 
  • Nevertheless understanding how to read trading charts is the first step to successful trading. It isn’t always the most fun, and can feel like a lot of work when starting out, but it is incredibly important. Reading a stock chart helps you find areas in the future you should buy and sell at by looking at the previous price performance of the stock. It also helps you identify the trend, and ensure you are trading with the trend
How To Read A Stock Chart

Here is a basic daily chart. Nothing but candlesticks and the price axis on the right, and the date at the bottom. Candlesticks and patterns are the ONLY indicator on this chart...which believe it or not, still tells us a lot about the direction of the stock.  We usually start out looking at plain charts and work our way up to using indicators. Often traders add too many indicators. Then we move backwards and start removing indicators until we have just the right amount to read the chart and have success in trading.

Nothing beats a simple candlestick chart when it comes to trading. Candlesticks have three components.

They have an upper wick, a lower wick and the solid body of the candlestick. The body of the candle is typically either red or green, but some traders change it to other colors of their preference. If it’s red, it tells you that the price at the close of the day is lower than the days open and it is a bearish signal for the day... but it could still be in a overall bullish uptrend and part of a healthy pullback. Let's talk more about candlesticks below.

1. Candlesticks

If the candle is green, it tells you that the price went up throughout the day and it closed higher than it opened. That is a bullish signal. The wicks indicate price action from the day. The wick signifies where short term price action moved to, and moved from before the candle stick closed. (ended its life on its time frame)

how to read stock charts for beginners

Above: Here is a quick example of a candlestick pattern that we drew up for our Instagram - note that I am a terrible artist. Anyway, take a look at the red candle after the green candle showing price opened lower and closed lower than the previous day. Candles can be bearish but so can chart patterns

Learning how to read stock charts helps you to predict trends in stocks, bitcoin, bonds or futures The goal, of course, is to become a technical analyst and be able to predict the right side of the chart (the blank part or future) before it happens. There is no 100% way to predict with 100% accuracy, but you can find high percentage probabilities, and manage your trading risk exposure along the way, and that is what is important. You should strive to become a master at reading candlesticks as they are the first line of defense in trading - nothing produces information faster on a stock chart than candlesticks. All other indicators LAG compared to price.

If you choose to study this path, you will not regret it. Our candlestick patterns course doesn't cost a dime to take and will cover the major patterns you need to know as a trader or investor.

2. Trend Lines Teach You How to Read Stock Charts for Beginners

You can find the trend on the chart by drawing trend lines. Don't just draw them aimlessly. Find areas on the chart where significant volume entered the stock, and where price pivoted up or down in a meaningful way.

Trend lines connect the prices together to show a direction for the stock, and many traders extend these trend lines ahead on their charts into the blank spacec to see where the future support or resistance may be.

If the trend line is going in an upward direction, the stock is bullish. If the trend line is going down, the stock is bearish. When the trend is sideways, the price action is in an indecision, or what we call a "trading range". When it's sideways, it hasn't picked a direction, and is often being either accumulated by traders , or distributed to traders. Sometimes this is healthy consolidation for the next move up. Other times it's simply preparing for a move lower. We will teach you the differences between this in our trade room. 

Learning how to identify the trend for any stock you want to get into just might be the most important part of reading stock charts.

3. Support & Resistance: How to Read Stock Charts for Beginners

Another thing you need to learn  in how to read stock charts for beginners is how to spot horizontal support and resistance. I can’t stress that enough!  

Support levels are where a price tends to fall multiple times without breaking. Price will bounce off the level instead of breaking through it. It has found support. Resistance levels are when a price goes up multiple times without breaking. ALL SUPPORT LEVELS OR RESISTANCE LEVELS WILL BREAK AT SOME POINT.

You always want to buy at support and sell at resistance in regards to your time frame. If you are building a trading plan around an hourly chart, find support on an hourly chart to plan your entry. If you see a stock that is moving up, that you want to trade the bullish momentum of, you always want to make sure it breaks resistance and holds before entering. The trade must be confirmed! Buying a stock at resistance can cause you to lose money right away if it does not confirm that it will hold.

How To Read Stock Charts

Check out the support and resistance on the futures chart above. price established a firm resistance zone and then broke out. Perfect opportunity to go long. Chart show is thinkorswim.

4. How to Read Stock Charts With Volume

Another important part of learning how to read stock charts for beginners is reading the volume of the chart. Is there a significant amount of volume at that support or resistance? On all different time frames, volume will come in and affect the stock chart. Spotting when and were volume begins to flood into the chart is very helpful to confirming your entry or exit. 

How To Read Stock Charts For Beginners

Notice the increase in volume on this chart of $ACB - the stock exploded on high volume, and continued to have volatility as long as the volume stayed relatively high. Once it tapered off, so did the price action and the stock chart stabilized and retraced. to lower levels

5. How to Read Trading Charts

There are different time frames you can use for how to read stock charts. For day trading and swing trading, I use the 1 minute, the 5 minute, 60 minute and the daily chart to find entries and exits. For traders, timing is everything, so I want the most synchronicity I can get on ALL TIME FRAMES. This means if I am looking for a bullish entry, I need to the patterns, and price action to be bullish on the 1, 5, 60, and daily charts, ideally, before I take a long trade. Let's use this Trendspider Chart of $SPY below as an example. 

How To Read Stock Charts

Note I have all the time frames in each window above. Do you see how the 9 EMA (blue line) is pointing up? That is called a bullish trend. Using moving averages properly along with price action is going to give you a great indication of the trend, and you will know if you are trading with it or against it. Never trade against it.

The pattern and trend is always easier to see when you zoom out and look at different time frames. The longer the trend is up, the more probable the trend is likely to continue. The same is true for bearish trends and patterns.

Other indicators as such moving averages, RSI and MACD can be added to the chart as additional confirmation to your trade, but don't overdue it when it comes to indicators or tools. Over complicating your chart could hurt your trading. Food for thought as you develop your trading plan. 

The RSI is going to show you if a stock is overbought or oversold. The MACD shows the trend. A lot of traders look to take a position as MACD begins to cross over to the upisde. Take our swing trading course to learn more about technical analysis and creating a trading plan that works for YOU!

6. Study

When learning how to read stock charts for beginners, it's important not to let your emotions take over. The psychology of trading, money, being right or being wrong can affect your trading positively or negatively. Listen to our podcast/webinar on being your own trading coach to see how this plays into being a great trader.  Charts hold a lot of knowledge and learning to read them will help with keeping your emotions in check. You need to be robotic, systematic, be a good risk manager, and remain POSITIVE to be a great trader. 

Not everyone learns at the same pace. That is why it's so important you pace yourself and not run before you can walk...or crawl. The Guru's will tell you that you can get rich NOW! That is complete nonsense. You will ALWAYS be a student of the market. Pick a winning strategy that works for your life schedule and master it. We'll help you discover who you are as a trader. For example, the gap and go strategy is a popular strategy that works for all stocks, not just pump and dumps. 

How To Read Stock Charts For Beginners

7. It Takes Effort

Anything worth doing takes practice and effort and learning how to read trading charts is no exception. If you haven't already and you'd like to learn more about trading be sure to take our courses on our website and join our community, trade room, and subscribe to our watch lists and watch list videos showing you how we find support and resistance levels to find stocks to trade. 

Free Trading Courses
>