Importance of Charts in stock trading

The stock market can deluge you with investment opportunities. There are numerous types of stocks with tempting names and promising futures with each stock appearing to be hotter than the other. Given this scenario, it is natural to feel a bit confused. So if you are not sure which stock to opt for, try to seek opinions of the experts.

The diversity of opinions may leave you more confounded. The truth is that most of these trading and investment opportunities are extremely risky. But you can make money if you proceed cautiously and intelligently. Millions of people across the world are making good money through stock trading despite occasional losses that are part of any game.

It must be borne in mind that no amount of expert advice, theorizing or fence -watching can do you any good unless you yourself make some practical efforts. You cannot learn swimming unless you jump into the water. The same applies for stock trading also. This does not, however, mean that you should make a blind start. Stock trading is not gambling in a casino-it is a game of intelligent calculation based on study and practical experience. You can calculate the present and future performance of a stock if you study its performance through charts.

Understanding stock charts

Stock charts are mines of information if only you know what to look for. Stock charts are available in several forms, styles, and types. You need a few basic skills that can be universally used to study all kinds of charts. If you learn to use your chart studying skills in conjunction with other stock indicators, you can vastly improve your earning potential.

Stock charts can provide you immense information about resistance levels. Resistance levels are the price levels which are difficult for a stock to pass through. There are two types of resistance—bottom and upper resistance. The bottom resistance is called a floor while the upper resistance is called a ceiling. When you buy a stock at bottom or floor resistance level, you expect the stock price to stabilize and rise up. When the stock reaches the ceiling level, sellers enter the market. The upward movement is stopped and the stock prices are possibly driven down.
The best course to spot the resistance levels on the stock chart is to find prices where the stock moves sideways. It must be noted that resistance levels are usually price ranges and not specific stock price.

Another important feature of stock charts is volume or the number of shares traded on a particular day. Most stock charts display the volume of shares traded along the bottom of the chart. You should look for the higher than normal trading activity. If a stock is trading higher on the high volume, it is much more likely to continue. If, however, the stock is trading higher on low volume, it indicates uncertainty and the gains may be short lived. If you do not study the volume, you will find it difficult to predict the price trends.

The third important feature of the stock chart is the gap. A gap occurs when a stock ‘jumps’ up or down leaving a blank area on the chart. Suppose a stock closes at $25 on a particular day and opens at $27 the next day, it would be a case of gap up. In this case the gap will become a resistance floor. Once the gap has been closed, it loses much of its steam on stock charts.

As said earlier, you should use the information gleaned from the stock charts in conjunction with other market indicators to confirm the validity of your assessment about your investment decisions.

The truth about the stock market is that despite the tall claims of the stock market pundits supported by facts and figures, the future of the stock market remains basically unpredictable. If it were not so, nobody would ever suffer any losses at all. This is the reason why a study of stock market charts is important. You may have found a stock with best fundamentals in the world. It may have millions of reasons to go up. Yet, it would go nowhere unless there are buyers. That is where the technical analysis or chart reading comes in. You can spot the stocks which are likely to rise up, or, go down.