How to Read a Stock Chart: Candles, Volume and Moving Averages

Start with the axes

Every price chart has two axes. The horizontal axis is time, from minutes to decades. The vertical axis is price. Before reading anything else, check two settings:

• The time range. A stock that is down 15% this month may be up 80% over five years. Always look at more than one range.
• Linear or logarithmic scale. On a linear scale, each grid line is the same dollar amount. On a log scale, each grid line is the same percentage. For long periods, a log scale is more honest: a move from $10 to $20 (100%) looks as big as a move from $100 to $200 (also 100%).

Line charts and candlesticks

A line chart connects closing prices. It is the cleanest way to see a trend. A candlestick chart packs four numbers into each period:

• The body runs from the opening price to the closing price.
• The thin wicks (or shadows) above and below show the period's high and low.
• Color shows direction: usually green or hollow when the close is above the open, red or filled when it is below.

Volume: how many shares changed hands

The bars along the bottom of most charts show volume, the number of shares traded in each period. Volume tells you how much conviction sits behind a move. A 5% jump on three times the normal volume usually means real news and broad participation. The same jump on thin volume may just mean few people were trading.

Volume spikes are your best clue to where the story is. When you see one, look up the date: there is often an earnings release, a filing or a major announcement behind it.

Moving averages

A moving average smooths the day-to-day noise by plotting the average closing price over a set window. The most common are the 50-day and 200-day averages.

• A price above a rising 200-day average is generally described as being in a long-term uptrend.
• When a shorter average crosses above a longer one, traders call it a "golden cross"; when it crosses below, a "death cross." These are descriptions of what has happened, not reliable predictions.

Support and resistance

Support is a price level where a stock has repeatedly stopped falling; resistance is a level where it has repeatedly stopped rising. These levels exist partly because people remember prices. Investors who bought at $50 and watched it drop may sell when it gets back to $50 just to break even, creating resistance there. Treat these as zones, not exact lines.

What a chart can't tell you

A chart shows what the price did. It does not show:

• Whether the company's earnings are growing or shrinking.
• How much debt it carries.
• Whether the current price is cheap or expensive relative to its profits.
• Whether the dividend is safe.

That is the "behind the chart" part. Pair what you see with the fundamentals: the P/E ratio, the earnings report and dividend safety.

A five-minute chart routine

1. Look at the 5-year chart on a log scale. What is the long-term direction?
2. Switch to 1 year. Mark the biggest up and down moves.
3. Check volume on those days. Which moves had heavy volume?
4. Look up what happened on those dates in the company's press releases or SEC filings.
5. Write the story down in one sentence per move.

If you can explain the biggest moves on a chart, you understand the stock far better than someone who only knows its price.