The basics of understanding charts, just how the heck do you read these things?! Well, after last week dipping into the basics behind making an actual online stock trade, market orders, and limit orders, I figure this week we could take our investor education to a new area, stock charts!
To make this simple, I have taken a stock chart and labeled the main parts that we will take note of. Below the chart I will explain these parts and what they mean when it comes to reading stock charts. So first let’s take a look at the chart example which is of the NASDAQ composite (guess the close anyone, haha):
When first looking at this, it is important to NOT be overwhelmed, this is very simple I promise! Let’s now break down these points:
- Chart Identification - Every chart is labeled and tells you what exactly you are looking at. So, if we look to the left of one we can see very clearly that we are looking at a chart of $COMPQ (Nasdaq Composite) INDX. The $COMPQ is the Symbol or ticker of the index. Just like Google has a ticker of GOOG, and Microsoft has a ticker of MSFT.
- Summary Key - The first number displays 2538.33 which is the last price of the index. Just to note, mostly all free stock quotes are 20 minute delays, but as of 3:03 PM EST the NASDAQ was apparently at 2538.33. Also note it says “(daily)”, which means we are looking at a DAILY chart of the index. You can view weekly and even monthly or yearly views, so this is important information! Below this we can see the blue and red lines (50 and 200) MAs. These are the price moving averages which I will explain more in point 4. Bottom line here though is that the summary key tells us some key numbers from the stock chart we are looking at.
- Dates - The X axis always displays the dates at which we are viewing. If you view the dates left to right you will find that we are viewing a chart of the 2007 months of January, February, March, and April.
- Moving Averages - This dips into technical analysis, and I have written an article explaining one these moving averages here. But to summarize these two lines, what they basically tell us is the price average of the stock (in this case index) over the last xx days. Traders will use 10, 20, 50, 100, 200 etc. day moving averages to help identify support and resistance within the chart. The purpose of displaying them here is for just visual and educational value.
- Volume - Volume is extremely important! It is HUGE when it comes to the market and judging momentum. You can literally make trades JUST off of volume patterns if you know what you are doing. Each bar represents one day, and the red line going through the tops is the average volume over the last xx days (in this case 60). So, the taller the volume bar, the more shares that were traded that day.
- Daily Trade Range - Just like volume, each bar on the chart represents one independent day. If the bar is red, that means the stock or in this case the index was DOWN overall on the day compared to the previous day. Black or white bars mean the opposite, that the stock was even or UP on the day compared to the previous day. So, we are looking at the movement of the NASDAQ composite index over the last few months, cool huh?
Test Your Knowledge
Later this week I will post another chart up and ask some questions for you to answer. Integrating learning here at Stock Trading 101! So, subscribe to the feed (google reader is most popular) and stay up to date would ya?! (Update: You can find the questions here, test your knowledge!)
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