Reading a stock chart can give you much more details then whether is a rising or falling trend. Understanding basis of resistance and support can be helpful in deciding when to buy or sell shares.
What is a Share or Stock Chart?
Every share you research will have a ‘chart’ – referred to as a share or stock chart. Websites such as Google Finance have a library of charts you can view depending on the share you are searching for.
When you are searching – you will notice that your results will show an abbreviated name or ‘ticker’. For example, the ticker for Rolls-Royce is RR. The result will also prefix the stock exchange in which the share is listed on: LON:RR (London Stock Exchange, Rolls-Royce).
Understanding the Numbers
Before looking to understand what the chart is showing, it is worth refreshing on the basic display. In addition to the ticker you will commonly find:
- The Share Price itself – supported with a (% increase for the day).
- M. Cap – the market capitilisation of a company or its overall value – cited in millions or billions.
- P/E Ratio & Div Yield – ratios that can give insight onto the true value or income potential of a share.
- Previous close – the price at which the share ‘closed’ at during the previous day’s trading.
- Volume – the amount of shares bought or sold during a day. Tracking the volume can give an indication of there is sustainable, long-term demand for the shares. So you should be cautious if there’s a sharp rise in price but low volume.
Moving onto the Chart – Identifying the Trend Line
The first thing you will notice on a Stock Chart is the ‘trend line’ – this is the roller-coaster-like line that shows the share price of a company over time. It will be full of ups and downs!
Viewing the trend line can help you give an indicator as to what’s generally going on over a period of time. But the challenge is to understand what way the trend is going in the long-run.
This is where some more analysis can help and you will often hear about the ‘resistance’ and ‘support’ levels.
Seeking Support, Identifying Resistance – Pattern Repeats
Any share or Stock Chart will be full of ups & downs. And understanding the extent of those is crucial to any buy or sell decision.
Firstly, let’s look at the the concept of Support. A support line is a trend for the share price not to fall below a certain price over a period of time. The pattern is generally a rise in price, followed by a fall, followed by a rise, and then followed by a fall (roughly at the same level of the original fall). Another way of looking at is as a barrier where the share price tends not to go below.
Now let’s look at the exciting part, the Resistance. This is where the share price is consistently breaking new ground, you will see multiple peaks at roughly the same level.
This then tends to fall again, but a new and higher support level should be created. As the stock climbs again, a new and higher resistance is created. This is a good growth trajectory and one you’ll see of the huge firms such as Apple that have enjoyed incredible long-term growth.
What this can provide you is an indication of where to buy and sell at. For example, you wouldn’t want to buy at a peak, but buying at a support is wise if you believe in the long-term prospects. Although it is worth noting that some major, unexpected bad news could put your plans into ruins and defy the logic of the charts!
Charts – More than just Pictures
Stock & Share Charts are more than just pictures. Whilst looking at a general trend line can give you a snapshot of historical performance, there is so much more to uncover. The key basic concept when looking at charts is to identify the resistance and support levels (which is subjective in itself).
But it’s important to remember that every chart has a story behind it – this is why like other methods of analysing shares, reading charts is just one of many techniques needed to help give you confidence in your decision.