Connecting the Dots for New Stocks Traders
The stock market can be a minefield to navigate, particularly if you’re a freshman on the scene. It’s difficult traversing a seemingly infinite maze of trading options, each with its own intricacies, price movements, and nuanced behaviors. As a new trader, it’s imperative to assess each stock on its merits. Foremost among the resources available to stocks traders are stock graphs.
These graphs are visual representations of price movements per unit time. The y-axis (vertical axis) represents price, while the x-axis (horizontal axis) represents time. Movements from left to right across a stock chart reveal pricing for the stock. In the sections that follow, we will provide guidance on how to read stock graphs.
Three possible scenarios may be evident with the performance of stocks over time:
- Prices are Increasing – this is indicated by an upward-sloping graph from left to right.
- Prices are Decreasing – this is represented by a downward-sloping graph from left to right.
- Prices are Moving Sideways – this is denoted by a flat stock chart with horizontal price movements.
Stock charts are static representations of price/performance. They are snapshots of time intervals, the specifics of which are determined by traders. You can input exact parameters related to time intervals, with beginning and end points for evaluation purposes.
A standard stock chart is arguably the most important resource available for ascertaining price momentum, trends, patterns, and performance of stocks. Be advised that charts are not predictors of future behavior; they are representations of past behavior. Having said that, price momentum tends to carry, at least for a while.
How to Read Stock Graphs for Trading
Source: StockCharts.com (NASDAQ: AAPL) Apple, Inc (March 20, 2021)
The above candlestick chart represents the performance of Apple Inc (NASDAQ: AAPL) since October 2020. It is called a candlestick chart because of the unique design of the red and white candles used to delineate pricing on the chart.
The white candles represent rising prices, and the red candles represent falling prices. A quick glimpse at the chart instantly confirms why it’s called a candlestick chart – they are shaped like candlesticks with wicks!
You may notice that the wick is strategically placed above, or below each candle. The reason for this is to clearly display the high price when the wick is at the top, and the low price when the wick is at the bottom. The entire candle represents the full range of price movement on any given trading day. It is known as the body of the candle and it includes the differential between the opening price and the closing price.
Sometimes the wicks are especially long, since the price rose or fell markedly during the course of the trading day. The longer the body of the candle, the greater the differential between the opening price of the stock, and the closing price. However, a more accurate measure of price movements is achieved when the wick is included.
Consider the following example with Apple (NASDAQ: AAPL) on any given trading day:
- Opening Price – $120
- Closing Price – $122
What happens if the price of AAPL rises to $123.50 during the course of the trading day, but then drops down to the $120 – $122 range? The wick of the candlestick would go as high as $123.50, but the actual candlestick body would have a floor of $120, and a ceiling of $122.
You will notice from the candlestick chart that various patterns can be ascertained. For example, the price of Apple stock dropped markedly heading into February 2021. From a high of around $142.50+, Apple dropped to around $115 – $117 by March 2021. It has since consolidated according to the chart as buyers rushed in to buy the dip.
Making Inferences from Technical Indicators
All stock charts can be equipped with a variety of technical indicators to better understand the performance of the stock’s pricing over time. Short-term moving averages and long-term moving averages are particularly beneficial. In the above chart, traders will notice the blue line which is labeled MA (50) 129.35. This indicates that the short-term moving average (50 days) price of AAPL averages out to $129.35.
Next, turn your attention to the red line which is positioned beneath the lower green Bollinger Band. The long-term moving average is calculated over 200 days, and is less influenced by current prices. The long-term moving average is currently $115.71, well beneath the spot price for AAPL (prevailing price) at $119.95.
– If the 50-day MA is higher than the 200-day MA, the stock price is rising
– If the 50-day MA is lower than the 200-day MA, the stock price is declining
– If the spot price is higher than the 50-day MA and the 200-day MA, prices will rise for all averages.
– If the spot price is lower than the 50-day MA and the 200-day MA, prices will fall for all averages.
It certainly requires a little practice to be able to make these judgment calls on stocks based on technical indicators. One of the most powerful indicators to use with stock charts is Bollinger Bands. For the purposes of explanation, we have exploded the view (zoomed in) to the recent performance of AAPL with Bollinger Bands in full view:
The green lines in the above chart represent the Bollinger Bands. The upper band has a level of 128.09, the lower band has a level of 117.04, and the center band has a level of 122.56.
These technical indicators are particularly useful when it comes to gauging possible price performance of a stock. Given that the price is $119.99, it is positioned below the center band, indicating a move towards oversold territory.
If the price continues to decline below the lower Bollinger Band, that would be a signal to buy the stock because a rebound is possible. If the price of the stock rises above the upper Bollinger Band, that would indicate overbought territory and a downside correction would be expected.