The stock market sees many different kinds of traders. There are bulls, there are bears, there are followers who blindly go by expert advice and there are the expert predictors. These market predictors are an enigma to newcomers to the share market. How do these experts work? What are their tools? Most experts analyze the market through stock market charts. To predict an accurate outcome, one has to master the art of interpreting stock charts.
Reading stock market charts is more of an art than a science because there is no single definite outcome that can be predicted from these charts. Different people may have different opinions on reading a particular chart. With experience, you can learn to read stock market charts and predict the outcome of stock performances with ease. Most seasoned traders foretell whether a stock will gain or decrease in value with just a glance at the stock’s chart. This article will cover the aspects of chart reading and the benefits of charts in investment decisions.
First, you should be able to recognize the market stage of any particular stock by just glancing at the stock chart for that stock. There are four market stages- consolidation, uptrend, culmination and downtrend.
- During their consolidation phase, stocks have normally reached the end of their downwards trend and trade flat looking for opportunities to move up. But since market confidence in stocks in this stage is low, traders don’t buy these stocks.
- When these stocks start moving upwards, confidence increases and people start accumulating these stocks though it takes some time for the stock to gain momentum. Often inexperienced traders realize this uptrend too late and buy when the stock has already approached its culmination stage.
- Culmination is when the stock has reached its peak. Here again, the stock will start trading sideways and this is not a good time to buy the stock.
- Once the culmination phase is over, stock prices start declining. It’s risky to buy stocks at this stage, but sometimes unavoidable because market confidence in these stocks is quite high. The charts are the only way to identify this phase.
Historic data in the stock chart will offer support and resistance levels for stocks. Support price is the bottom price of a stock in downtrend; stocks don’t go below this level. Similarly, when the stock’s in uptrend, there’s a resistance price that stocks find difficult to breach. These levels are very useful in determining your stop loss and profit booking prices.
Stock charts also have other information like volumes being traded and moving averages. Moving averages are indicators of the trend; when the 20 day moving average is higher than the 60 day moving average, the stock is in uptrend. High trading volumes in the stock chart indicates that there are many buyers or sellers for that stock. This is a healthy sign.
The internet has facilitated online live charts that help us keep a track on all stocks. DJIA charts offer a clear picture of the Dow 30 stocks while FTSE charts help us keep track of the top 100 stocks of the London Stock Exchange. All we need to do now is to learn the art of interpreting charts and base our investment decisions on these interpretations. Needless to say, these charts are just indicators, not influencers. There are external influencers that can affect the stock performance regardless of what’s indicated in the chart. So just use these charts as a guide to your market decisions and not as the sole pointer.