How to Read Stock Charts?

The Indian stock market thrives on information and stock charts are a visual representation of this information, offering valuable insights into a company's share price movements. This blog empowers you, to unlock the secrets of stock charts. By learning to read them effectively, you can make more informed investment decisions.

Imagine a Stock Chart as a Story

Think of a stock chart as a story about a company's share price journey over time. The X-axis (horizontal line) represents time, while the Y-axis (vertical line) represents the price of the share. The lines, bars, and indicators on the chart tell the story of the company's performance, price fluctuations, and potential future trends.

Example: Decoding a Daily Price Bar

Let's say you're looking at a daily price bar for Reliance Industries (RIL) on a specific day. The top of the bar might be ₹2,900, indicating the highest price RIL reached that day. The bottom might be ₹2,800, representing the day's lowest price. If the left tick mark is ₹2,850 and the right tick mark is ₹2,880, it suggests RIL opened at ₹2,850 and closed at ₹2,880 that day.

Types of Stock Charts and How to Analyse Them

Understanding basic line charts is a great first step, but the world of stock charts offers a wider variety to suit different investment styles. Here's a glimpse into some popular types and how to analyse them:

Line Charts

These simple charts are a great starting point, offering a clear view of price movements over time. By analyzing trends, you can gauge investor sentiment and potential future price movements.

The graph explains the price fluctuations over the 6moths duration 

Bar Charts

Bar charts are similar to line charts but use vertical bars to represent the price range for each time period (day, week, etc.). Each bar has:

Top: Represents the highest price of the share during that period.

Bottom: This represents the lowest price of the share during that period.

Body: The thickness of the bar indicates the closing price (usually thicker at the close).

Analysing Bar Charts

Long Bars: Large price fluctuations within the period.

Short Bars: Relatively small price movements.

Colour of the Bar: Some charts use colour to differentiate between closing prices higher (blue) or lower (yellow) than the previous period's close.

Example:

The graph represents the High, low and closing price movements of a stock at different periods.

Candlestick Charts

These are more complex than line or bar charts but offer a wealth of information. Each candlestick represents a specific time period and visually depicts the opening price, closing price, high price, and low price for that period. The "body" of the candlestick shows the difference between the opening and closing prices, while thin lines (called wicks or shadows) extend upwards and downwards, indicating the high and low prices, respectively.

Analysis of Candlestick Charts

The colour of the body (green or red) indicates the closing price relative to the opening price. Green typically signifies a closing price higher than the opening price (upward movement), while red signifies a closing price lower than the opening price (downward movement). The length and position of the wicks can also provide clues about buying and selling pressure.

Point and Figure Charts

Point and figure charts use Xs and Os to represent price movements, focusing on significant price changes rather than every fluctuation. They can help identify long-term trends.

Analysing Point and Figure Charts

X Formation: Represents a price increase.

O Formation: Represents a price decrease.

Box Size: The minimum price movement required to create a new X or O.

Source: The Data Visualisation Catalogue

Key Elements of Stock Charts for Beginners

While candlesticks (detailed price bars) offer advanced insights, here are some essential elements for beginners:

Opening and Closing Prices

The opening price is the price at the start of the trading day, and the closing price is the price at the end of the trading day. The price line typically starts and ends at these points for each day.

Trendlines 

A trendline is a straight line drawn connecting several price highs or lows, indicating an upward (uptrend) or downward (downtrend) trend. Uptrends suggest potential price increases, while downtrends suggest potential price decreases. Remember, trendlines are not guarantees, but they can help identify potential price movements.

Moving Averages 

Moving averages smooth out price fluctuations and help identify the overall trend. A simple moving average (SMA) is calculated by averaging the closing prices over a specific period (e.g., 50 days). If the price line is consistently above the moving average, it might indicate an uptrend. Conversely, if it's consistently below, it might indicate a downtrend.

Volume

The volume bars at the bottom of the chart represent the number of shares traded on a particular day. Higher volume bars indicate more activity and potential volatility.

Exploring Technical Indicators

While past performance isn't a guarantee of future results, stock charts often incorporate technical indicators to help analyse potential trends. These indicators use mathematical formulas to analyze price and volume data and may suggest buy or sell signals. However, it's crucial to remember that these indicators are not foolproof, and other factors can influence stock prices.

Common Technical Indicators for Beginners

Moving Averages: These smooth out price fluctuations to identify potential trends.

Relative Strength Index (RSI): To understand the stock charts, the Relative Strength Index (RSI) helps in measuring the momentum of price movements and suggests potential overbought or oversold conditions.

Conclusion

Understanding stock charts is like learning to read a company's story through its share price movements. With this guide, you now have the basic tools to interpret different types of stock charts, like line, bar, and candlestick charts. By grasping key elements such as trendlines, moving averages, and volume, you can make more informed investment decisions. Start practising these skills to confidently navigate the Indian stock market and enhance your investment journey.