Basic Stock Market Chart Analysis

If you are thinking about stock trading then it is essential to have at least a minimum understanding of technical analysis and stock market charts. Technical analysis involves studying stock charts and indicators in an attempt to determine whether the stock is likely to increase in price or decrease in price.

One factor that is important in technical analysis is that there are many thousands of professionals who use it and believe in it i.e. they believe certain chart patterns provide signals as to when to buy or sell a stock. As a result if enough of them come to the same conclusion and decide to act in the same way, then this will influence the stock price and thus technical analysis becomes a a self-fulfilling prophecy.

This is why it is useful to at least grasp the basics of stock charts and have some idea as to what signals are being created.

The following are some of the basic tools used in analyzing stock market charts

OHLC Bar Charts
An OHLC bar chart shows the price at which a stock opens, its high price, its low price and its closing price all in one neat graphic. The opening price is shown by a horizontal line to the left, the high price is shown by the top of the vertical line, the low price is shown by the bottom of the vertical line and the closing price is shown by a horizontal line to the right.

Support and Resistance Levels

A support level is the price at which a stock finds 'support' i.e. investors are more likely to buy the stock at this level than to sell it and so this forms support and prevents the stock price falling lower. A resistance level is the price at which a stock meets resistance i.e. investors are more likely to sell the stock at this level than to buy it and so this creates resistance and orevents the stock price moving higher. Volume Volume is simply the number of transactions completed over a given period of time. It shows whether a stock is in demand. It is considered important that volume be high if a stock is moving up or down as this means the move is more likely to continue.

Moving Averages

A moving average is calculated by taking the price of a stock at certain intervals of time and working out the average price e.g. if a stock price is $2 $2.10 $2.20 $2.30 $2.40 over a 5 days then by adding the five prices together and dividing by 5 we obtain the 5 day moving average i.e. $2.20. This value is plotted on a graph and each day a new value is plotted, over time this forms a line which shows the 5 day moving average.

Sometimes a moving average line can act as support or resistance. Different moving averages can also be plotted and compared. When a shorter period M.A. crosses over a longer period M.A. whilst both are moving in the same direction this is considered to be a buy signal if they are moving up or a sell signal if they are moving down.

The 200 day M.A. is considered important. If the price of a stock moves above or below the 200 day moving average then this is considered to be a buy signal or a sell signal as the case may be. This shows how charts can become self-fulfilling prophecies, as when traders see that the 200 day moving average has crossed they will tend to act in the same way, thus causing the stock to rise or fall even further, thus proving they were right to act the way they did. It is important therefore to be aware of such signals when timin gyour stock trading decisions.

For more information on technical analysis see Stock Market Investing