How to Read Stock Chart Patterns: A Beginner’s Guide

Table of Contents:

  1. Understanding stock chart patterns
  2. Common stock chart terms to know
  3. Reading stock charts
  4. More to consider when analyzing trends
  5. FAQs about reading stock charts
  6. The bottom line

Investing as a beginner is, in a word, daunting. There’s so much to learn, and nothing about it seems obvious. Between all the unfamiliar terms, jargon, patterns, and charts, you may wonder how you’ll ever learn it all.

The good news is that you’re not alone. Learning about the stock market is complicated, and it will take some time to understand. Still, it can be done, so be sure to give yourself the time you need to feel comfortable.

One thing you’re probably familiar with is stock charts. Look at any chart, and you’ll see colorful red and green bars and squiggly lines that travel across the whole graph. They look like some sort of secret code, but believe it or not, when starting your investment journey, learning to read charts is a great place to start.

Key Takeaways:

  • In order to make more informed decisions about which stocks to invest in, some traders analyze price changes, trading volume, and trends in stocks.
  • The 3 basic charts to learn as a beginner are bar charts, line charts, and candlestick charts.
  • Stock chart patterns offer help in evaluating investments and potentially finding opportunities for trading.

Understanding stock chart patterns

What’s a stock chart? It’s a chart that shows information about a stock that includes current trading price, price changes, history of high and low prices, trading volumes, dividends, and a company’s financial information.

Chart patterns are at the core of technical analysis, which evaluates investments and opportunities for stock trading through the use of price trends and patterns viewed on stock charts.

Technical analysis is based on the theory that past performance, trading activity, and price movements can be valuable indicators of what the stock may do in the future. When evaluating stock charts, there are basically 3 actions stocks take. They trend upward, downward, or consolidate, and each of these actions forms a pattern.

Having the ability to read and understand stock chart analysis helps you learn how a stock is performing and the direction it’s moving in, which may offer a projected view of how it might perform in the future. The information a stock chart provides can help investors evaluate stocks and make more informed investment decisions.

Common stock chart terms to know

When learning how to read stock market charts, look for the following terms:

Ticker symbol – The symbol used on the stock exchange to identify the stock of a company; for example, The Walt Disney Co. New York Stock Exchange (NYSE) ticker symbol is DIS, and the Nike NYSE ticker symbol is NKE.

Each stock listed on the stock market has a specific ticker symbol, so when you decide to invest in a company, you use the ticker symbol to place orders. In many cases, the ticker symbol is a shortened version of the company name, but not in all cases, so it’s essential to verify the company when looking up its ticker symbol. Stock market hours are from 9:30 am to 4:00 pm EST from Monday – Friday except during holidays, when there are modified trading hours.

Opening price – is the price of the stock at the opening of the market on any given day that the market is open.

Closing price – is the price of a stock when the market stops trading during regular stock market hours. If the closing price is higher than the previous day’s close, it’s considered an upward trend. In contrast, it’s regarded as a downward trend if it closes lower than the previous day.

The previous close – is the price the stock closed at the previous day.

The day high and low – the highest and lowest prices the stock traded at from the opening of the market to the close of the market on that day other than the opening and closing prices.

The 52-week high and low – the highest prices and the lowest prices the stock closed at during a particular 52-week interval.

The P/E ratio – is the price to earnings ratio and is calculated by dividing the current stock price by the earnings per share over the past year.

Trading volume – refers to the number of shares traded during trading hours.

Dividends per share – are small payouts of the company’s profits to the shareholders. It should be noted that not all companies pay dividends, but for those that do, they may be shown on the stock chart.

The dividend yield – is the percentage return on the dividend calculated by dividing the annual dividend by the current stock price.

Market cap – measures the company based on the number of outstanding shares multiplied by the current share price.

Trend line – a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

Reading stock charts

Stock charts offer some valuable information, but you need to understand what you’re looking at and what that data means to be beneficial. So, what can stock charts offer?

  • Tools for planning – Stock charts not only show what the stock is doing but can also show how buyers and sellers are trading that stock, which can be beneficial.
  • Decision-making process – It’s tough to know when is a good time to buy or sell, but charts can help to organize and clarify the information so you can make an educated decision.
  • Identify trends – Stock prices can vary throughout the day, and seeing trends can help determine the timing of trades.

Types of stock charts

There are 3 basic types of stock charts that make it visually easier to identify trends. They include:

Bar charts – Charts with multiple bars that show price movements throughout the trading day, illustrating the opening price, the high, the low, and closing prices.

When viewing a bar chart, you’ll see an assortment of price bars that show the price changes over time. The vertical lines display the lowest and highest prices over a period of time, with the opening price indicated with a small horizontal line to the left of the vertical line. The closing price is marked by the horizontal line to the right.

To make charts even easier to read, colors are used to show certain activities. For example, when a closing price is higher than the opening price, the bar may be green or black, and if the closing price is lower than the opening price, it’s red.

Line charts – A line chart is a series of data points connected by a line. Usually, the data points are closing prices and can specify any timeframe. Since the line chart generally only shows closing prices, it can help investors reduce the chaos of the price changes that occur throughout the trading day, making them a good resource when investing as a beginner.

Line charts can also include volume and moving averages along with closing prices. Again, the simplicity can help hone chart reading skills needed to read and understand more complex charts.

Candlestick chart – A chart that shows the open, close, high, and low prices of a stock over a period of time and can be utilized when looking for patterns. Candlestick patterns express investor sentiment, which is the general attitude investors have about the stock market based on factors that may include price history, stock reports, and, more broadly, world events, and can help them determine when to enter or exit trades.

On a chart, each candlestick will have a color that points to either a high or low closing price for that time period. Colors may include black, white, red, and green, with green or white representing high closing prices for the period, and red and black representing low closing prices. The body of the candle shows the stock’s price range from opening to closing, and a wick at both top and bottom shows the lower and upper levels of the price range.

Additional factors to understand

Stock charts can be invaluable in learning how stocks may perform and can offer an overview of the stock market as a whole. Understanding stock charts means you have a handle on a few other factors as well.

  • Pay attention to axes – When looking at a stock chart, you’ll see 2 axes. The vertical axis displays the stock’s price, and the horizontal axis shows the selected time period. They can help investors plot the trend lines that show a stock’s price over a specific time period.
  • Trading volumeTrading volume measures shares of a stock that’s traded (bought and sold) over a specific time period and can be a signal of a stock’s demand.
  • Support & resistance levels – Support lines represent the lowest price the stock will usually go, and the resistance line is the price the stock won’t typically rise above. Stocks generally stay within these lines as prices fluctuate but not always.

3 types of chart patterns

One benefit of chart patterns is the ability to see changes quickly to make better decisions based on real-time stock market activity.

  • Breakout pattern – It’s called a breakout pattern when a stock has been trading in a range for a certain amount of time and then breaks out of that range.
  • Reversal pattern – When a trend ends and changes direction, it’s called a trend reversal pattern.
  • Continuation pattern – When a pattern continues in the same direction, it’s a continuation

More to consider when analyzing trends

Stock charts come in various types. As discussed, the most popular are bar charts, line charts, and candlestick charts. Most of the time, you have the option of what kind of chart you want to view and whether or not to use overlays.

Overlays are technical indicators placed on the price section of a stock chart. The overlay provides important information that can be seen visually, such as the direction of a trend, trading price ranges, and stock movement over time.

Although daily charts are common, other time frames are also available, such as weekly, monthly, year to date (YTD), and 5 year, 10 year, and lifetime historical dates.

There are both advantages and disadvantages to using different charts. Although they all offer valuable information, the one you can read and evaluate the easiest will be the most beneficial, but what works for you is an individual choice.

FAQs about reading stock charts

How can I start investing in stocks?

To start investing, you’ll need a brokerage account, but they are simple to set up. Check out the Public app to get started.

Do trends continue over long periods of time?

Stocks may stay put for a while, but eventually, the trend will change to an uptrend, downtrend, or show some type of corrective action.

Can there be signs of a trend reversal?

Some signs to look for are momentum indicators that show a stock slowing before it reaches its peak, which can indicate it may be getting ready for a trend reversal. In addition, various chart patterns can make it easier to watch and identify changes in the stock. Although, to be clear, none can predict or guarantee what will actually happen.

Do stock trends change in a similar way?

When it comes to trends, some stocks move at a slow pace while others move more quickly and experience more volatile movements with sudden changes and reversals.

What type of stock chart is the best? Bar, line, or candlestick?

Investing is very individual, and the tools available to help investors are as well. Each investor should evaluate what type of chart is most beneficial for them and their trading style. Since each chart offers strengths and weaknesses, many investors may use one or all at various times, depending on their specific goals.

What are the basic volume patterns traders use as indicators?

Volume indicators can offer analysis that may help to confirm trends in the market. They include:

  • High volume trading on up days – a bullish indicator that the stock price will continue to rise.
  • High volume trading on down days – a bearish indicator that shows traders are mostly selling the stock.
  • Low volume trading on up days – a potentially bearish indicator, not as strong as high volume on down days.
  • Low volume trading on down days – a potentially bullish indicator with low trading and may signal corrections rather than significant price movements.

Are there chart patterns that work all the time?

Investing is an ever-changing environment, and there are no guarantees of anything working 100% of the time (or 50% of the time or at all), including chart patterns. Getting the best results takes practice and finding what works for you. But it’s always a gamble.

How many stock chart patterns are there?

The 3 main patterns include reversals, breakouts, and continuation patterns. Within these 3 patterns, there are a variety of possibilities.

How can you tell if a stock will rise or fall?

We know that bullish patterns are expected to move up while bearish patterns are expected to move down, but the stock market is a volatile place, and we never really know what’s going to happen.

The bottom line

Although learning to read and understand stock charts is beneficial for investors and offers a variety of useful skills to help identify opportunities in the stock market, research can be done to investigate all aspects of stocks to help you evaluate whether they are the right investment for you. Of course, there’s never any guarantee for success.

If you’re new to investing in stocks, you don’t have to do it alone. So join our investing community, download the Public app today!

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

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