Most worthwhile projects or goals require a series of steps and perseverance. After all, you wouldn't want to visit a doctor who had just decided that afternoon to go into medicine! Anything at all complicated requires preparation, know-how and tenacity over a period of time. That's also true when you decide to become a better stock-market investor. One of the steps involved in that process is learning to read stock charts, also called technical analysis.
Anybody can learn technical analysis. All it takes is a stock charting program. There are many free options available on the Internet, as well as services you can pay for. Generally the paid services offer additional information, but you can master the basics with a free program.
Here's how to do just that in 5 simple steps.
Things You Will Need
Online stock charting software
Understand Price And Volume Bars
This can be really crucial since price and volume are the basic building blocks of stock charts. You can find these represented in various forms on different chart programs. High, low, close is one common representation. Candlestick is another. Fortunately, the price and volume areas of a stock chart are fairly simple to comprehend. Generally, one color signifies a day or week in which a stock closed higher; a different color signifies a day or week in which it closed lower. Volume bars are higher for heavily traded times, and lower when fewer shares changed hands.
Identify Moving Average Lines
These are also key to understand a stock's price movement. The moving average lines show the average of closing prices over a specified period of time. They are useful in showing you whether a stock is getting support from professional investors, like mutual funds or hedge funds. If a stock falls below a key moving average, such as the 50-day, then it often means professional investors are bailing out of the stock. This is significant because professional investors determine the direction of the market. If you notice signs of their selling, it may be time for you to also sell shares.
Identify Basic Stock Chart Patterns
Stocks tend to form the same kinds of patterns, over and over again. The cup with handle and double bottom are two chart patterns that stocks often form before making big moves higher. If you learn to spot these patterns, you could potentially identify big winners before they zoom up in price. That's a way that many successful growth investors have made money in the stock market.
Understand Trend Lines
Just to clarify and explain that a little, stocks often form distinctive trends as they are moving up or down in price. One of the best ways to identify a trend is by drawing a line between three points on a stock chart. If you can spot that trend line, you can also see if a stock is breaking it. That's often a sign of trouble. Here again, the most successful stock market investors have learned to identify these signals early, and protect their gains.
Learn To Use The Relative Strength Line
If you follow these tips, you will be on your way to successful stock chart reading. It's really not as difficult as many people claim, and with a little practice, it will help your investing immeasurably.
This is a very handy element of many charting programs. It shows you a stock's price performance relative to the general market, usually as represented by the S&P 500 benchmark index. The relative strength line is a quick way to visually determine how well a stock's price action is doing against the broader market. If the line is heading lower, watch out! It means your stock is seriously under performing, and that's not the type of investment
Tips & Warnings
Don't try to learn more complicated indicators at the beginning. Stick with the simple ones. That will be plenty to get you started as a more successful stock investor.