How to read charts and graphs

How to read charts and graphs

How to read charts and graphs

Yes, we have one more thing to learn when entering the markets.

How to read the charts.

Stock picking is hard, and understanding stock charts are the first step toward success. 

What is a stock chart?

In this course, we will break down the essentials stock chart and explain the key things you need to focus on.

We used Yahoo! Finance. Now let’s take a look at a typical stock chart. We’ll use well-known Apple for this course.

When you search AAPL, for example, you will get this.

How to read the charts

Just scroll up and down until you see the chart with their performance for the last 5 years.

You will see this.

We took the liberty of filtering only to the last 5 years

So here we’re looking at the last 5 years of Apple’s stock.

Now let’s dive into the different pieces and parts of the stock chart so you can begin to read one like a pro.

What can you see? 

Do you see this blue line? It is so called Trend line.

This is that blue line you see every time you hear about a stock. It’s either going up or down right? 

How to read charts and graphs

While the trend line seems like common sense, there are a few things we want to call out so you can understand it in a little more detail.

First, know that stocks will take huge dives and also make huge climbs. You have to keep your emotions in check to be a successful investor.

Don’t react to large drops or huge gains in a positive or negative way. You should be using this piece of the stock chart merely to see what’s going on.

In fact, the trend line should lead you to dig further. To understand those ups and downs. Where they are coming from, why, what happened before, what causes them.

If you take a brief look at this chart you will see that the iPhone maker’s stock had lost nearly 6.2% of its value in just two days. 

The decline in that two days came after Mizuho Financial Group downgraded the stock to neutral from buy and lowered its price target to $150 from $160.

What happened? 

At that time, the investors already expect strong iPhone 8 sales in the coming product cycle, likely limiting gains in Apple shares. And the same consumers driving those solid sales this time around will likely not spend on a new iPhone soon, reducing potential growth in fiscal 2018.

Can you see the pick on October 2018?

What happened then?

Revenue in the September quarter came in at $62.9 billion, up 20 percent from the same quarter last year. Analysts were expecting $61.57 billion.

Apple stock earnings per share clocked in at $2.91, up 41 percent from the $2.07 per share it earned a year ago. That number easily exceeded the $2.78 per share expected by Wall Street.

The Cupertino, California-based tech giant also guided for revenue between $89 billion and $93 billion in the all-important holiday quarter. The midpoint of $91 billion was materially worse than consensus estimates of $92.91 billion, which was a major factor in the stock’s post-earnings reaction.

Through the close of trade on that day AAPL stock had risen 29 percent year-to-date.

You have to look for lines of support and resistance in the chart.

These are levels at which the stock stays within, over a given period of time. 

A level of support is a price that a stock is unlikely to drop below. And a level of resistance is one that it’s unlikely to go above.

A stock’s price bounces within these lines of support and resistance just like the ball bounce back and forth between barriers when you are bowling, for example.

Our goal is to know when to buy and when to sell. Let’s take a look at the stock chart again to see an example:

How to read charts and graphs

This process is very important. First know that everyone will draw lines of resistance and support differently, depending on their investment horizon. Meaning, how long they plan to hold the stock.

If you plan on holding it for a long time, you may not draw as many lines of support and resistance, because you don’t care as much about the ups and downs. But if you’re a short-term investor, you may draw more to analyze trends during a shorter period.

Let us break down the image above with each of the trend lines:

How to read charts and graphs
  • Line A is the very first line of support shown. Based on trends prior to this, it would be comfortable that the stock price won’t go below this point. And you should probably consider buying at this price or higher.
  • Line B is the first line of resistance. You see that the stock has peaked at that point for now. So you wouldn’t expect it to go higher. You would probably consider selling at this price or slightly lower.
  • Line C, the stock has bottomed out again, thus creating a new line of support.
  • Line D shows the stock price has increased significantly and you are comfortable to establish this as a new line of resistance.

You can see the trend continue with Lines E and F bringing new lines of support and resistance as time goes on.

It seems complex, but don’t fret. It is. And a lot of it is guesswork.

If you want to buy stock in Apple today, you should make note of your most recent line of resistance (Line E) pricing out at just over $225 a share and your most recent line of support (Line F), which was priced at around $152 a share.

Knowing this, you can safely assume that the stock price won’t drop below $152 and it shouldn’t go above $225, barring any major news or company changes.

At $157 per share currently (at the moment of writing this course), you can feel that this is a good price point and would probably make a purchase. You might even wait to see if it drops below $157 to feel even better.

Knowing the lines of resistance can help you decide when to buy or sell a stock. 

Remember, though, that it’s subjective and it won’t give you a clear-cut road map on exactly what to do. You’ll have to use some of your own analysis and judgment.

You have to know when dividends and stock splits occur.

At the bottom of the chart, you’ll see if and when the company issued a dividend, as well as if there was ever a stock split:

How to read charts and graphs

A dividend is when the company (the board of directors) decides to give a portion of its earnings back to its shareholders.  If you own the stock, you get a small chunk of the profit.

Some companies issue dividends, some don’t. Just because a company does or doesn’t issue a dividend doesn’t mean it’s not worth investing in. There are plenty of other factors to consider.

Some companies just prefer to focus on growth, so they’ll reinvest their earnings as opposed to giving it back to the shareholders. Other companies (like Apple) can pay dividends without sacrificing growth.

In this case, Apple did a more than 10 to one stock split (noted as 10:1), which means that for every share of AAPL you owned prior to the split, you’d now have seven. So if you owned 100 shares of APPL prior to the split, you would now have 1000.

The value of the company doesn’t change, but the share price might. Companies will often do this if the price isn’t in line with competitors or to attract smaller investors.

You can see the uptick in the trend line after the split occurred, too. Many times when a stock split happens, more people invest (since the share price is often lower) which increases demand and, in many cases, the overall share price.

How to understand historical trading volumes

At the very bottom of the chart, you can see many small, vertical lines. This is a trend of the volumes at which the stock is traded.

Volumes are good to know, but shouldn’t be your only determining factor when buying a stock. Usually, trading volumes increase when there is major news (good or bad) about the company.

When volumes are increasing, it can also shift the price of the stock quickly. Let’s look at an example:

How to read charts and graphs

 

Line A, you can see there was a high volume of trading activity that corresponded with a drop in the stock price. There may have been news that day that caused people to panic (aside from the entire economy crashing that year).

Line B, you can see a slight uptick in trading volume that corresponds with an upward trend in the stock price.

Don’t always assume there will be a correlation between stock price and trading volume, but it’s good to know what the volumes have been in the past and what they are currently before making a decision.

With high volumes comes greater ease when buying or selling. If a lot of people are trading the stock that day, you should be able to buy or sell it quickly.

That’s the basics of how to read a stock chart. Once you’ve mastered these techniques, you should be able to analyze a stock’s historic activity at a high level.

Remember that past performance doesn’t correlate to future indications on price. Meaning that just because Apple hit $157 per share recently doesn’t mean it will again. 

There’s also nothing to say it won’t double in price. You just can’t know.

Quiz yourself on reading and understanding charts in the following quiz:

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