Reading stock market graphs allows you to intelligently evaluate potential stock purchases using price histories.A form of technical analysis, it employs previous price and/or trading volume statistics to predict future stock price movements. Three common types of stock market graphs -- line graphs, point and figure charts, and candlestick charts -- indicate patterns in the data. If you can read them, you can applying trading rules on the basis of that data. Through skillful use of stock graphs, you can improve the timing of your entry into and exit from stock positions based on solid information rather than emotional hunches.
Locate price ranges on the Y-axis and dates on the X-axis. A stock price range is a vertical line that spans from the day's lowest trade price to the highest. Most versions indicate the opening and closing prices as well.
Buy stocks in up trends. Recognize an up trend on a line graph as successive dates having price ranges featuring higher highs and higher lows. Avoid stocks with successively lower highs and lower lows, which signify a downtrend.
Trade stocks when prices pierce trend lines. Line graphs usually superimpose a 40-day moving average of prices upon current prices. Sell stocks when current prices fall below the 40-day average; buy stocks when they rise above the moving average.
Avoid trading when volume is low. Temper your buy and sell decisions to avoid placing trades based on signals given on a low-volume day. A price-volume line graph depicts daily trading volumes at its base. Trading volume is represented by a vertical line -- the taller the line, the higher the volume and the more credence you can give to any trade signals generated for that day.
Point & Figure Charts
Identify up trends and downtrends. Point & figure charts are grids that use X's for rising prices and O's for falling prices. Each box in the grid represents a contiguous arbitrary range of prices and is filled with an X or O as a stock price enters a price range. Columns of X's and O's alternate to reflect alternating trends. P&F chart columns show price movements without regard to time periods.
Trade shares on upside/downside breakouts. A buy signal is generated by an upside breakout -- when a column of X's rises one box above the top of the previous column of X's. Sell signals arise from downside breakouts between two columns of O's.
Trade shares when trend lines are pierced. A resistance trend line connects the tops of descending columns -- buy shares when pierced by X's rising above the line. A support trend line connects the bottoms of ascending columns -- sell shares when pierced by O's falling below the line.
Take profits when a P&F chart reaches a price objective. Price objectives are horizontal lines you add to a P&F chart that indicate a price at which you would be willing to sell your stock. Prudent traders take some or all of their profits when price objectives are reached.
Identify the trading range of a stock. A candlestick is an image depicting a single time period of a stock's price trading range. It is composed of a rectangular "candle body" with one top and one bottom vertical wick -- called "shadows" -- protruding from the body. The body top and bottom represent a stock's opening and closing prices. The tip of a top shadow is the stock's high price for the day; the tip of a bottom shadow shows the daily low. If a stock closes higher for the day, the body is colored green; otherwise it is red.
Buy stocks when candlesticks are indicating higher prices -- a condition termed "bullishness." A tall body means that buying or selling pressure was lopsided. Bullishness is depicted by a tall green body or by a body with no top shadow --
a stock closing at its high. Avoid stocks depicted by red bodies or shadowless bottoms.
Sell stocks when candlesticks break support. Support levels bound the range of candlestick shadow bottoms for a given time period. When a stock price pierces a support level, a downward price trend may unfold, providing incentive to sell the stock.
If you are using stock charts to help you decide which stocks to buy, first try hypothetical trading to give your strategy a test-drive before committing funds.
Select charts with time intervals that mirror your own trading strategy. Day-traders want time intervals measured in minutes so that they can catch early trends, whereas long-term investors may prefer charts with daily or weekly data.
Find a good primary source to learn how to glean maximal information from the many simple and complex patterns that occur on candlestick charts.
Stock charts, and indeed all forms of technical analysis, are not always reliable predictors of future prices. They are best used in conjunction with other analysis techniques, such as researching the fundamentals of a company before you purchase stock. Remember, a stock's previous behavior may not have any bearing on its future activity.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.