When used with other stock indicators the following charting skills can help you greatly improve your trades.
Resistance levels are price levels that a stock has a difficult time busting through. The bottom resistance is called a floor. The upper resistance is called a ceiling. Typically, buyers enter the market around the floor price to stabilize the price and possibly drive the share price back up. When a stock is reaching its ceiling, sellers will enter the market stopping the upward momentum and even driving the stock price back down. The best way to spot resistance levels on a stock chart is to find prices where the stock moves horizontally. For example, if a stock is trading around 15 and then trades down to 10 but then begins to move sideways at 10 and eventually heads back up in price, then 10 is probably a price floor. The more times a resistance level is tested, the stronger it becomes . However, if a resistance level is broken it usually results in upward momentum. For example, if the stock mentioned above broke through its price floor of 10 then the price floor would become the price ceiling. Keep in mind that resistance levels are usually price ranges not a specific stock price.
Another important feature of stock charts is volume (the number of shares traded each day). Most stock charts will show the volume of shares traded along the bottom of the chart. Look for higher than normal trading activity. If a stock is trading higher on high volume it is much more likely to continue. However, if a stock is trading higher on low volume, it may be a sign of uncertainty and the gains may be short lived. Without the conformation of volume it is very difficult to be sure of any price move or new trend.
A gap is when a stock “jumps” up or down leaving a blank area on a chart. For example, if a stock closed the previous day at $12 but opened the next day at $14, this would be a gap up. In this example the gap will become a resistance floor. However, if the gap is penetrated, it will often fill the entire gap or close the blank space before resuming its trend. Once the gap has been closed it loses much of its significance on stock charts.
Here’s a quick clip for all you beginners with some very basic, but important information about reading stock charts:
Using stock charts can be a helpful tool. However, stock charts use historical data and future price movements may differ. Most active traders rely heavily on stock charts and indicators to make their investment decisions.