Trading stocks using charts

Charts are the basic tools for technical analysis. Charts conveniently visualize the price action by displaying the historical market data of the primary financial instrument on a graph.

What Are Stock Charts?

Charts are the basic tools for technical analysis. Charts conveniently visualize the price action by displaying the historical market data of the primary financial instrument on a graph. This visual representation allows for better identification of rare and common price patterns. Technical analysis tries to answer questions concerning price action. What is the trend? What are the support and resistance? Where is the stock heading to? What is the sentiment on this stock? The answers to these questions are eventually played out in time. Charts assist traders in mapping out the price history and possible outcome trajectory to make better-informed trades.

Why Traders Need Charts

Charts are like a map. History always repeats itself. This has proven itself a number of times in financial markets. Price action fits well into repeating patterns. Financial charts are the best way to illustrate this natural recurrence. Reading and interpretation of charts can be subjective to the individual methodology. The good thing about charts is that with time, the correct interpretation will prove itself as transparency materializes. Nonetheless, by then, it may be too late to catch a profit opportunity. The name of the game is to take advantage of the transparency before it fully materializes.

Predictive and Foreshadowing Elements

While every stock trader will use charts in his/her own way, the major goal is still the same. Stock charts enable traders to view in order to make calculated predictions about a stock's future price action. For many day traders, stock charts are the basic source of data used in their strategy. Day traders will look out for chart patterns, analyze volume, and then pinpoint significant price areas. By doing so, a trader can increase their chances of profitability before entering a trade. Basic stock chart terms to know.

Market cap Sometimes written as “Mkt cap,” it means market capitalization, and it measures the size of a company based on the number of its shares on the stock market and then multiplied by its current share price. In Apple's case, it has a market cap of $2.1 trillion — one of the biggest in the world

Open, high, low, and previous close. The open is simply the first price at which a stock trades during normal market hours, while high and low reflect the highest and lowest prices the stock reaches during those normal hours, respectively. Previous close is simply the closing price of the previous trading day.

PE ratio PE ratio stands for price-to-earnings ratio, which some investors may use to decide if a stock is undervalued, overvalued, or fairly valued.

Dividend yield. Sometimes written as “Div yield,” dividend yield shows how much an investor may receive annually in dividends (cash payments firms may offer to shareholders), expressed as a percentage of the current share price. For apple's case, their quarterly dividend for the past four quarters was $0.2050 per share. Multiply that by four (for a full-year dividend), and you get $0.82, which is 0.66% of its current share price of $125.12.

52-wk high and low The 52-week high is the highest price or point that the stock has traded for during the preceding 52 weeks, while the 52-week low is the lowest price the stock has traded for during the preceding 52 weeks.

As you continue learning about stock charts, keep a few points in mind:

• It's rare for a stock to move in one direction. Swings are normal.
• What appears to be a big spike or slump may not be. Look at the y-axis; prices may range from a few cents' difference to a few dollars, depending on the stock.
• Even if a stock price is rising in the short term, that increase may be a blip amid a prolonged decline. Look at longer time horizons (one, three, and five years) for a complete picture of trading activity.
• Not all charts will be right for your time horizon. Poring over an intraday price chart, which looks at one day's fluctuations, won't make sense for someone who plans to be invested for 20 years. A day trader, however, may find it helpful.