How to read stock charts

In this post I will be showing you the basics of how to read stock charts and the right way to interpret them.  I will try to keep it as simple and easy to understand the different variances and factors that go into making the right decision.  There are many variables and ways you can read these stock charts to help identify when to buy or sell to maximize your profits.  The first piece of advice I would give you before we even start looking at stock charts and all the different variables is what type of trader are you.  This can be a key factor if you are planning on day trading or playing options.  If that is the case you would want to pay very close attention to the volatility of the stock.  This can be a very telling sign when learning how to read stock charts.  Which I will go into further in another post. Also things can happen very fast in the market and I want you to be on top of it by noticing key factors that I will be teaching you using stock charts.  That being said looking at a daily stock chart is not always going to give you the full spectrum.  You would still want to look at weekly, monthly, and even the past years charts.  There are many reasons why you want to take a look at these.  This pertains to anyone trading stocks, bonds, etc. long or short holdings.  The first thing I will get into is volatility and how to interpret this.

Interpreting High Daily Volume

In general, it is a sign of strength when stock prices rise on higher than average volume. This implies increased demand. In other words, the value of the stock is rising and the number of investors are willing to pay the higher stock price. When you have a stock that falls on higher than average volume, this is a sign of weakness and implies excess supply. The value of the stock is falling and the amount of investors trying to get rid of their shares is increasing.

Interpreting Low Daily Volume

In General Price movements that occur on lower than average volume are interpreted in the opposite way. When you have a stock rises in price on lower than average volume, you might take a look and be happy that the stock has increased. But you really should also be concerned that the number of investors willing to buy that stock at a higher price has fallen. The lower the volume, actually means you should be worried about the strength of that stock. When you have no buyers left at the higher prices, and all the investors are selling the stock, there is only one way the stock will go and that is down.

The same thing applies if a stock falls on lower volume, only in reverse. Falling prices mean the value of the stock has decreased, but with low volume this suggests that fewer investors are willing to sell their shares at the lower price. So after investors stop selling the stock as much and they start buying more shares rather than selling the stock, the price of the stock should rise. Interpreting prices and volume movements can be tricky, however if you know how to read stock charts, it can greatly improve the timing of your buys and sells and help you to figure out how long you should hold a stock. To recap, when you are learning how to read stock charts for a company that you own, you would like to see it rise on heavy volume and fall on lighter volume. This is the sign of a healthy stock whose price is going up.  Also I will be doing more posts on on how to read stock charts so please stay tuned.