Investing in an index or mutual fund is recommended if you’re a new investor. In addition, you will reduce risk as you learn more about the stock market by diversifying your trading portfolio.
Keep reading if you are familiar with investing and want to improve your stock-picking skills.
It is important to know how to read and understand trading charts when purchasing individual stocks. The purpose of this guide is to teach you how to understand trading charts.
How to understand trading charts?
Knowing how to read trading charts can help you better predict how a stock will perform in the future by breaking its showing.
You can request any chart with TradingWolf. It can be stocks, cryptocurrencies, FX, indices, or commodities trading. A wider range of options is available. You can easily recognize patterns, fast money, and straightforward entry or exit moments with our indicators. To fully utilize the power of a stock chart, you must understand four key data points.
1. Analyze the trendline
Despite its commonsense appearance, the trendline is that blue line you see every time a stock is mentioned.
Make sure you do not react positively or negatively to large drops or huge gains. This piece of the stock chart should be used merely to observe what’s happening. You should dig deeper if the trendline leads you to do so. Apple’s business took off from 2009 to 2012, for instance.
What happened between 2012 and 2013? At one point, the stock was down more than 40%!
Using your trendline will be useful here. Pay attention to the news when it coincides with a dramatic shift in the trendline. This type of hit is not something that can be recovered from by all strong companies.
2. Identify support and resistance lines
In the next step, you’ll want to consider the lines of resistance and support. Within these levels, the stock stays for a given period. Support is a price that is unlikely to fall below, and resistance is a price that is unlikely to rise. Until something drastic changes, such as a reduction in profit margins. As you bowl, the ball bounces between these inflated barriers.
The price of a stock does the same thing within these support and resistance lines. Despite being subjective and interpreted differently by everyone, the process is crucial. Every investor draws resistance and support lines differently depending on how long they intend to hold the stock.
If you plan to hold it for a long time, you will not care about ups and downs as much as you do about support and resistance. Short-term investors may draw more to analyze trends during a shorter timeframe.
3. Be aware of dividends and stock splits
In order to distribute a portion of the company’s earnings, the board of directors distributes dividends to shareholders. Owning the stock means you get a small cut of the profits.
There are some companies that issue dividends, and there are some that don’t. It doesn’t matter whether a company issues a dividend or not; it’s still worth investing in. As well as these factors, there are many others to consider. Several companies (like Apple) are able to pay dividends and grow at the same time. Apple began paying dividends to shareholders in 2012 and continues to do so today.
4. Identify historical trading volumes
Many small, vertical lines are visible at the bottom of the chart. A chart represents the trading volume of the stock. A stock’s volume is important but shouldn’t be your only consideration. There is usually an increase in trading volumes when the company receives major news (good or bad).
Increased volumes can also cause the stock price to change quickly. Consider the following example: The high trading activity seen in Line A is indicative of a drop in the stock price accompanied by a drop in trading volume. People may have panicked that day because of the news (in addition to the entire economy collapsing).
An upward trend in the stock price correlates with a slight increase in trading volume in Line B.
Find out what the volumes have been in the past and what they are now before making a decision. Don’t assume that stock prices and trading volumes will correlate. A high volume of transactions makes buying and selling easier. You will likely be able to buy or sell the stock quickly if many people are trading the stock that day.
Conclusion
This is a basic explanation of how to understand a trading chart. A stock’s historical activity can be analyzed at a high level if you master these concepts.
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Future performance cannot be predicted based on past performance.
