How to Read Stock Charts Like a Pro

At first glance, it may seem as if those who perform technical analysis on stocks possess extraordinary abilities, backed by advanced degrees in mathematics. It could seem as though they hold some kind of mysterious knowledge.

However, let me dispel that myth.

Technical analysis of stocks involves identifying patterns within price charts and using those patterns to guide your investment choices.

The truth is, anyone can acquire the skills to read stock price charts and conduct stock technical analysis – and that includes you.

In this article, we will cover the essential basics about how to read stock charts. We will examine the most common technical price patterns and how to interpret them.

It’s important to remember that no technical indicator is foolproof, and their accuracy can vary depending on market conditions and the specific security being analyzed. Technical indicators are most accurate in liquid markets, longer timeframes, trending markets, and when used together or in combination with other tools.

Additionally, it’s crucial to note that technical analysis focuses on the movement of prices, not the underlying reasons for their fluctuations.

Technical Analysis Fundamentals

In the realm of price chart reading and technical analysis, it’s essential to follow the KISS principle:

Keep It Simple, Silly!

How to read Stock Price Charts

When reading price charts for stocks or other assets, you can choose between different ways to display the prices. You can choose between line chart, bar chart, and candlestick chart. Candlestick charts present a clear visual representation of an entire trading session’s price movements, including the open, high, low, and close. This makes them one of the most straightforward methods for interpreting technical analysis.

The red and green rectangles are called “candles” and represent price movement within a specified time period.

Green candles indicate that the price increased during that time period, while red candles show that they decreased.

Green candlesticks we call Bullish, and red candlesticks we call Bearish. If you see a series of green candles going upwards, this usually indicates a bullish run. Likewise, if you see a series of red candles going downwards, this usually indicates a bearish run.

Below you see the Tesla price chart in USD. It displays the value of one share of Tesla in US dollars over time with candlesticks.

In this chart, the time period is set to one day (1D). This means that each candle represent the price movement for 1 day. You can confirm this by looking at the top left corner (highlighted with a blue ring).

To summarize the key points from the image:

• The rectangles shown represent price movements during a specific time period.

• Green candles indicate an increase in price.

• Red candles signify a decrease in price.

• The time period can be found in the top left corner.

Examining Price Candles in Detail

Below, you’ll see the same image. We are still using a daily timeframe, but now it’s the Tesla/USD price chart.

As you’ve learned, the candles provide insights into price movements during a specific time period, in this case, a day.

Let’s delve deeper:

Observe the two arrows in the image below. The top arrow starts from the peak of the red candle, while the bottom arrow begins at the base of the same red candle:

The arrows point towards the right vertical axis, which displays the Tesla/USD price.

The upper arrow points to the “opening price,” representing the price at the beginning of the day.

The lower arrow points to the “closing price,” indicating the price at the end of the day.

Key points from the image:

• Red candles represent days when the price has decreased. Thus, the opening price is at the top of the candle, and the closing price is at the bottom.

• Green candles indicate a price increase. In this case, the opening price is at the bottom of the candle, and the closing price is at the top.

Wicks

Upon examining the candles, you’ll notice thin lines extending above and below some of them.

These lines are called “wicks.”

Wicks represent price spikes or dips that occurred within the day but ended before the daily close.

Example: Suppose we start a day in May 2023 at $199 and go up to $200, only to fall back down to $191 by day’s end. What would the candle look like?

It would be red, with the top of the candle at $199 (opening price) and the bottom at $191 (closing price). There would also be a wick, a thin line, stretching up to $200.

Now you have enough knowledge to start performing technical analysis on Tesla’s price chart!

Let’s recap quickly:

¨• The green and red rectangles indicate whether the price has moved up or down within a given time period.

• The bottom/top of the green/red candle represents the opening price, while the top/bottom of the green/red candle represents the closing price.

• If the price spikes/dips but returns to its original level before the candle closes, a “wick” forms, which is a thin line extending above or/and below the candle.

• You can check the time frame in the top left corner and the price on the right vertical axis.

Now let’s move on and analyze a few charts!

Candlestick Patterns

Now you know how to read a basic candlestick pattern, it’s time to look at some candlestick patterns explained with examples:

1. The Hammer:

The Hammer is a special shape that show up on stock price charts, helping us predict possible changes in the stock’s price direction. These shape represent a battle between buyers and sellers in the market.

Imagine a tug of war between two teams: one team is trying to pull the stock price up (buyers), and the other team is trying to pull it down (sellers). The Hammer shape visually tell us about the outcome of this tug of war in a specific time frame.

When you see a Hammer shape on the chart after the stock price has been falling, it suggests that the sellers were initially in control, pulling the price down. However, during the same time frame, the buyers fought back and managed to push the price up again, ultimately closing near the starting point. This sudden comeback by the buyers indicates that they are gaining strength, and the stock’s price might start going up soon.

While this shape can provide helpful clues about potential changes in the stock’s price, it is not always a perfect predictor. It’s essential to consider other factors and tools when making decisions in the stock market.

Illustration of the Hammer:

2. The shooting Star

The Shooting Star pattern is a candlestick pattern that appears on a stock price chart, providing information about a possible reversal in the stock’s price direction.

Imagine a shooting star that appears in the sky, leaving a long trail behind it. The Shooting Star pattern on a stock price chart looks similar, with a small body (red or green) and a long upper shadow, with little or no lower shadow. The shape of the candlestick visually resembles a shooting star, hence its name.

The Shooting Star pattern typically appears after an uptrend when the stock’s price has been rising. It suggests that the buyers were initially in control, pushing the price up, but the sellers came in and pushed the price down, closing near the opening price or lower. The long upper shadow indicates that the stock’s price rose significantly during the time frame but then fell, indicating a possible trend reversal.

This pattern is most effective when it appears after an uptrend and is followed by a downtrend, indicating a shift in momentum. When you spot the Shooting Star pattern on a stock price chart after a long uptrend, it could be a signal that the buyers are losing control, and the sellers might take over, leading to a potential downtrend in the stock’s price. However, it’s important to note that this pattern is not always perfect and should be used in conjunction with other technical analysis tools to increase its accuracy and reliability.

Trendlines – Support and Resistance

Central to any technical analysis are “Resistance” and “Support” lines (trendlines).

Trendlines give us insights into the buying/selling activity of traders at specific price ranges.

They help us predict where many people will sell, pushing the price down, and where many people will buy, pushing the price upwards.

The following part is key to understanding technical analysis:

Below you see the Bitcoin/USD price chart, on a daily time frame, with two blue “trendlines” drawn on it.

Notice how the price seems “trapped” within the two yellow lines?

Also, when the price finally broke out above the upper line, notice how it surged significantly?

This pattern is called a “symmetric triangle”.  A symmetrical triangle chart pattern shows a time when prices are moving sideways, as buyers and sellers are trying to figure out which way the price will go next. This pattern looks like a triangle with both sides sloping towards each other. Eventually, the price will either break out above the top line of the triangle, signaling the beginning of an upward (bullish) trend, or it will break down below the bottom line of the triangle, indicating the start of a downward (bearish) trend.

Let’s examine it in detail so you can learn to spot them on other price charts.

The Yellow Lines (trendlines):

• The lower line is called the support line. This is the “price floor” where we bounce back up or at least don’t fall below.

• The upper line is called the resistance line. This acts as a ceiling, where the price is pushed back down whenever it approaches it.

The Yellow Ring (breakout):

I’ve highlighted something with a red ring, something extremely important – previous resistance turned into support.

We finally broke above the resistance line and “successfully tested it as support,” meaning that we fell back down to the line but bounced back up (as shown in the red ring above).

Think of it as transforming the previous resistance into a springboard for further growth.

When you see something like that, previous resistance turned into support, it’s a strong signal to buy.

If we do the opposite – break down below the support and turn the previous support line into resistance – be cautious!

Below you see a drawing of how the bearish scenario would play out:

This is bearish (pessimistic) and indicates that we are heading further down. Below you see a drawing of how the bearish scenario would play out:

What you need to remember:

• Turning previous resistance into support = bullish (buy signal)

• Turning previous support into resistance = bearish (sell signal)