How To Read Stock Charts For Beginners
How to read stock charts for beginners
Hi everyone, I am Anagh Pal, the content and communications lead at Vested. Today, I have with me Viral Shah, who looks after Analytics and Growth at Vested and is also an avid investor. In today’s video we will discuss how to read and understand stock charts.
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Ok, now let’s get started!
Anagh: Viral, could you please tell us when you started learning stock charts and taking an interest in them?
Viral: Sure Anagh, See my first job was as a market analyst when I started trading in commodities. While doing that job I started learning about investing and also developed an interest in analysing stock charts.
Over time, I understood about different types of stock charts like line charts, candlestick charts and so on and I also learned about different strategies and indicators and had experience in trading using my learnings.
Since then, I have developed a fascination for reading and understanding stock charts and it has been a great learning experience for me.
Anagh: Thanks Viral. Which brings me to my next question – how would you introduce our viewers to reading & understanding stock charts? Also, what are the important concepts to understand in this context?
Viral: When we discuss reading and understanding stock charts, It is important to understand the two concepts first – technical analysis and fundamental analysis.
Fundamental analysis is a study about how a company is performing while technical analysis is a study of how investors/traders think that company is performing.
So in other words – Fundamental analysis is the study of finances & policies of the company while technical analysis is the study of the psychology of traders & investors.
Now Stock charts are basically the graphical representation of the price activity and volume activity. While, technical analysis is basically identifying trading opportunities by analysing statistical trends & graphical patterns on these charts. So, in other words, just like any other science, technical analysis is the study of patterns which helps in predicting the price movements.
Anagh: Ok, now that we know what’s meant by fundamental analysis and technical analysis, can you please explain why it is important to read and understand stock charts?
Viral: Sure. While investments are made due to fundamentals of a company, it is often a lagging indicator for a retail investor, because they cannot know the ongoing effects of the company’s policies. But, sudden changes in a company’s fundamentals are first reflected in its price.
So in such a market, technical analysis is an additional study which provides the investor an additional data point for entry and exit into a particular asset.
Anagh: Ok, could you tell us what are some of the important elements in a stock chart one needs to understand?
Viral: See, technical analysis is a very broad topic. It is majorly used to gauge momentum of the price.
So to put simply, PRICE and VOLUME are the 2 most important details that govern the movement of a stock. Price Action,which refers to how the price of a stock is moving has various patterns which have been observed by traders in the past. Also, a lot of mathematicians have come up with studies to determine the strength & weakness of that price action. These patterns and studies can help investors to understand & predict the price trend of a stock.
Anagh: Thank you Viral, can you explain the above with an example?
Viral: Sure, let me just share my screen
Now this chart is a candlestick chart of which is widely used to do technical analysis.
On the x-axis we have time and volume and on the y-axis we have price. Now this particular chart is of Apple in a daily time frame. Which means each candle represents the price movement on a particular day. Now looking at this candle, we see that it has 5 different parameters attached to it. Lets understand them one by one.
First is High which high price of the stock
Second is low, which is the low price of stock
Then Open which is the opening price of the stock
And then Close which is the closing price of the stock
Then there is Volume below which tells us how many shares were traded on this day.
All these parameters taken together determine the price action which tells us the underlying behaviour of the investors in a stock, while volume tells us the intensity of that price action. And study of the patterns gives us the probability of the price direction.
Anagh: That’s a good example you shared. It gives us an idea of how to read a stock chart. Could you now tell us if there are any myths about technical analysis of stock charts which our viewers need to be aware of?
Viral: Yes. The first myth is that technical analysis is only for traders.
But the reality is that technical analysis can be a tool for anyone who wants to make an informed decision to invest in a stock. It is an additional data point that one should use while making decisions. According to me, a mix of technical and fundamental analysis works best.
And the second myth is that technical analysis is a very large topic and you need to read & understand a lot.
But the reality is that while the amount of learning material on technical analysis can be overwhelming, one doesn’t need to read everything. Also, it is not possible to read everything. How much you need to know depends on how much indulgence you want with the stock market. For normal retail investments, knowing basic price action is enough. And It gets easier once you start applying the learnings.
Anagh: Ok viral – To round up, is there anything else you would like to add for our viewers?
Viral: Ya anagh I would suggest that you add technical analysis to your investing flavour and the results will be phenomenal. Also, it is advisable to take a step-by-step learning approach to technical analysis. Remember, it is not rocket science!
Thanks Viral for taking us through how to read and understand stock charts.
Anagh: If you have any further questions about stock charts, do leave them in the comments below .
And finally, If you want to invest in the US stock market directly from India, create an account with Vested. Click here