How to Read a Stock Chart
A stock chart is a picture of price history. It cannot tell you what a company is worth or what will happen next, but it does show how the price has moved, how actively the stock has traded and how volatile it has been. Learning to read one takes a few minutes.
The axes
The horizontal axis is time, and each point or bar covers a period such as one minute, one day or one week. The vertical axis is price. Most charting tools let you switch the time range, from a single day to many years.
Chart types
- Line chart: connects closing prices. It is the cleanest way to see the overall trend.
- Bar chart (OHLC): each bar shows the open, high, low and close for the period.
- Candlestick chart: shows the same four prices as a bar chart, with a colored body between the open and close. Read more in Candlestick Patterns.
Volume
The bars along the bottom of most charts show volume, the number of shares traded in each period. Big price moves on heavy volume suggest broad participation. Moves on light volume can reverse more easily. Volume often spikes around earnings reports and major news.
Moving averages
A moving average smooths out daily noise by averaging the price over a set number of periods, such as 50 or 200 days. A simple moving average weights every day equally, while an exponential moving average gives more weight to recent prices. Traders watch whether the price is above or below a moving average and when shorter and longer averages cross.
Support, resistance and trends
Support is a price level where a falling stock has repeatedly stopped declining, and resistance is a level where a rising stock has repeatedly stalled. An uptrend is a series of higher highs and higher lows, and a downtrend is the reverse. These are observations about past trading, not guarantees.
Linear versus log scale
On a linear scale, each step on the price axis is the same dollar amount. On a logarithmic scale, each step is the same percentage change. Over long periods, a log scale gives a fairer picture, because a move from 10 to 20 and a move from 100 to 200 are both a doubling.
Adjusted prices
Long-term charts are usually adjusted for stock splits, and some are also adjusted for dividends. If a chart shows a sudden, huge drop that never appeared in the news, check whether it is an unadjusted split.
Keep charts in perspective
Chart reading, often called technical analysis, studies price and volume patterns. Fundamental analysis studies the business itself: revenue, earnings, debt and competitive position. Long-term investors usually lean on the fundamentals and use charts mainly for context. Be skeptical of anyone who claims a chart pattern can reliably predict the market.