How to Read Stock Charts and Patterns for Beginners (2024)

Basics of How to Read Stock Charts

Let’s talk about how to read stock charts successfully. When new investors or traders first begin, the types of charts that people on social media share can be great but overwhelming to read. They seem to show so much, yet understanding what they are trying to show can be difficult initially. This is because you don’t have a good foundation on reading them…yet. We are here to change that for you. Seasoned trader’s charts aren’t as simple as those shared on CNBC or local news. There is a lot more to them.

Nevertheless, understanding how to read trading charts is the first step to successful trading. It isn’t always the most fun and can feel like a lot of work when starting, but it is incredibly important. Reading a stock chart helps you find areas in the future you should buy and sell at by looking at the previous price performance of the stock. It also helps you identify the trend and ensure you are trading with the trend.

Nothing beats a simple candlestick chart when it comes to trading. Candlesticks have three components.

They have an upper wick, a lower wick, and the solid body of the candlestick. The candle’s body is typically either red or green, but some traders change it to other colors of their preference. If it’s red, it tells you that the price at the close of the day is lower than the day open, and it is a bearish signal for the day… but it could still be in a bullish uptrend and part a healthy pullback. Let’s talk more about the candlesticks below.

If the candle is green, it tells you that the price went up throughout the day and closed higher than it opened. That is a bullish signal. The wicks indicate price action from the day. The wick signifies where short-term price action moved to and moved from before the candle stick closed. (ended its life on its time frame)

Learning to read stock charts helps you predict trends in stocks, bitcoin, bonds, or futures. The goal, of course, is to become a technical analyst and be able to predict the right side of the chart (the blank part or future) before it happens. There is no 100% way to predict with 100% accuracy, but you can find high percentage probabilities and manage your trading risk exposure along the way, which is important.

It would be best if you strived to master reading candlesticks as they are the first line of defense in trading – nothing produces information faster on a stock chart than candlesticks. All other indicators LAG compared to price.

If you choose to study this path, you will not regret it. Ourcandlestick patterns eBook will cover the major patterns you need to know as a trader or investor.

You can find the trend on the chart by drawing trend lines. Don’t just draw them aimlessly. Find areas on the chart where significant volume entered the stock and price pivoted up or down meaningfully.

Trend lines connect the prices to show a direction for the stock, and many traders extend these trend lines ahead on their charts into the blank space to see where the future support or resistance may be.

If the trend line is going upward, the stock is bullish. If the trend line is going down, the stock is bearish. When the trend is sideways, the price action is indecisive, or a “trading range.” When it’s sideways, it hasn’t picked a direction and is often accumulated by traders or distributed to traders.

Sometimes, this is healthy consolidation for the next move up. Other times, it’s simply preparing for a move lower. We will teach you the differences between these in our trade room.

Identifying the trend for any stock you want to enter might be the most important part of reading stock charts.

There are different time frames you can use to how to read stock charts. I use the 1-minute, 5-minute, 60-minute, and daily charts to find entries and exits for day trading and swing trading. For traders, timing is everything, so I want the most synchronicity I can get on ALL-TIME FRAMES.

If I am looking for a bullish entry, I need the patterns and price action to be bullish on the 1, 5, 60, and daily charts before I take a long trade. Let’s use this Trendspider Chart of $SPY below as an example.

Another important part of reading stock charts for beginners is reading the chart’s volume. Is there a significant amount of volume at that support or resistance?

The volume will affect the stock chart in different time frames. Spotting when and where volume begins to flood into the chart is very helpful in confirming your entry or exit.

Another thing you need to learn to read stock charts for beginners is how to spot horizontal support and resistance. I can’t stress that enough!

Support levels are where a price tends to fall multiple times without breaking. Price will bounce off the level instead of breaking through it. It has found support. Resistance levels are when a price goes up multiple times without breaking.ALL SUPPORT LEVELS OR RESISTANCE LEVELS WILL BREAK AT SOME POINT.

You always want to buy at support and sell at resistance regarding your time frame. If you are building a trading plan around an hourly chart, find support on an hourly chart to plan your entry. If you see a stock that is moving up that you want to trade the bullish momentum of, you always want to ensure it breaks resistance and holds before entering.

The trade must be confirmed! Buying a stock at resistance can cause you to lose money immediately if it does not confirm that it will hold.

The pattern and trend are always easier to see when you zoom out and look at different time frames. The longer the trend is up, the more probable the trend is likely to continue. The same is true for bearish trends and patterns.

Other indicators, such as moving averages, RSI, and MACD, can be added to the chart to confirm your trade, but don’t overdo it when it comes to indicators or tools. Overcomplicating your chart could hurt your trading—food for thought as you develop your trading plan.

The RSI will show you if a stock is overbought or oversold. The MACD shows the trend. Many traders look to take a position as MACD crosses over to the upside. Take our swing tradingcourse to learn more about technical analysis and creating a trading plan that works for YOU!

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