One of the first things you notice about the stock market is the stock charts and graphs. They look all cool, have flashing colors and all of that cool stuff, right? Stock charts are great tools to help you analyze the history of a certain stock or index, but can you actually predict the future of the stock market from looking at historical charts?
Using charts to predict the future stock market is called technical analysis. If you were to turn on the tv and listen to a business channel for a while, you would more than likely see a technical analyst telling you that because a stock hit a certain price within a few weeks, then the stock price is about to explode. These guys use very technical language that makes them sound very smart, but do you actually believe in this analysis? I hope not. You will hear a lot of people trading wall street based on how a chart looks, call me crazy, but I think it is silly.
Looking at a historical stock market chart can be a great way to learn from the past. There are trends in the stock market, and yes, sometimes trends do repeat themselves. You can easily sport correlation between different factors with the market. For instance, if you expect the market to be flat over the next six months, what happens with certain sectors of the market? Like with every aspect of stocks, hope is big factor, but you will be able to learn about stocks some when looking at stock charts.
When researching equities, you will see different style of charts.
Candlestick Charts are similar to bar charts, but contain more information.
When looking at each individual bar on a candlestick chart, if the chart is set to daily, each candle will tell you where the stock opened, high and low for the day, and where the stock closed whether up or down. For starters, if the candle is red, obviously, that means the stock is down for the day. If the candle is green, that means the stock is currently trading higher or has closed higher than the previous trading day. The highest point of the candle represents the stock’s high of the day. The lowest part of the candle represents the stock’s low of the trading day. It sounds complicated, but take a look at the image below that explains it visually.
The classic line chart is the chart type most investors view to see historical prices or how the market reacted to certain events. The line chart shows a stock or index’s closing price over a specified time period. This is the chart that you will see if you were to view Google Finance. Notice the bar chart at the bottom, this shows the trading volume of the stock or index.
The line chart doesn’t show what the stock or index did in the trading day, but a stock’s closing price is the most important information you can get when looking at charts.
The last type of stock market chart is the bar chart.
This type of stock chart goes more in depth on a stock’s pricing throughout the trading day than the line chart. As seen below, the chart is somewhat similar to a candlestick chart. The vertical line of the chart represents a stock’s high and low for the day. This gives you a better idea of how certain stocks react to news. The horizontal line represents a stocks closing price for the trading day. The stock bar chart can tell you a lot of information showing how a stock trade intra-day.
Should you trade using a stock market chart?
In conclusion, stock charts will tell you a lot about how a stock or index trades. Although, I do not believe in technical analysis, some people swear by it. Personally, I use stock charts to tell me how equities reacted to certain news in the past. For instance, the recession. There are certain trading patterns that can potentially make you money, but I always use the investing fundamentals.