From A to Z: Mastering Stock and Forex Chart Reading Skills

When entering the trading world, the first and most important step is to master how to read stock charts. Through technical charts, you can identify price trends, market volatility, and make informed trading decisions. So, how can you accurately interpret stock charts? Let’s explore the detailed methods of reading candlestick charts below.

3 Types of Stock and Forex Charts You Need to Know

Line Chart - The Most Basic

This type of chart only shows the closing price of the selected time frame, providing an overview of the long-term trend of the stock.

Advantages: Simple, easy to understand; offers a broad view; suitable for comparing long-term performance of multiple stocks.

Disadvantages: Does not display intra-period price fluctuations; not suitable for short-term analysis.

Bar Chart (HLC/OHLC) - More Detailed

This chart provides data on opening, closing, high, and low prices during a trading session. The OHLC chart is more common because it includes the opening price.

Advantages: Provides complete price information; bar length indicates volatility; easy to identify price patterns.

Disadvantages: Thin bars can be hard to see during long-term analysis.

Japanese Candlestick Chart - The Most Popular

Candlestick charts offer similar information to bar charts but are more widely used because they reflect the psychology of both buyers and sellers, helping analysts determine optimal buy or sell points.

Advantages: Provides comprehensive price movement information; displays both long-term trends and short-term market sentiment; numerous analysis patterns with high accuracy.

Disadvantages: Excessive information can be overwhelming for beginners.

Basic Components of Stock Charts

To interpret stock charts effectively, you need to recognize the following elements:

1. Stock information: name, current price, percentage change during the session
2. X-axis - representing time frame (seconds, minutes, hours, days, weeks, months)
3. Y-axis - price scale
4. Technical indicators added
5. Chart type used
6. Tools for drawing resistance, support, and trend lines
7. Available indicators such as MACD, Bollinger Bands, MA, RSI

Important Information When Reading Charts

Trend Line Identification

Having an overview of the overall trend is the most fundamental first step. Identifying trends across short, medium, and long-term timeframes will help you make more accurate decisions.

For example, when looking at the AAPL weekly chart, you may see a clear upward trend. However, on the daily timeframe, the price fluctuates frequently. Based on this trend identification, you might conclude that the medium-term price will continue to rise, but to enter the market at the best point, you should wait for daily dips to buy at lower prices.

Support and Resistance Levels Identification

Support and resistance are price levels that help you determine buy and sell zones:

• Support level: price rarely falls below this, supporting upward movement
• Resistance level: price struggles to break above this, hindering upward momentum

The simplest way to identify these is to find price levels where the trend often reverses. For example, with Bitcoin, the price often bounces down when hitting the red line, indicating resistance, and bounces up when touching the blue line, indicating support. Each time the price hits these levels, their effectiveness diminishes, increasing the chance of a breakout.

Trading Volume Analysis

Trading volume shows the supply and demand of a stock during a session or period. It is usually displayed below the price chart.

• Price rising with increasing volume is a strong signal
• Price rising but volume decreasing may warn of reversal
• Price falling/rising with high volume indicates fundamental change

Combining volume analysis with trend assessment provides a more solid basis for market predictions.

Analyzing the Impact of Fundamental Events

Events such as stock splits, earnings announcements, or dividend payments significantly influence prices. For example, Tesla’s stock split created a long green candle, but afterward, the price reversed downward as shareholders took profits. On earnings release days, stock prices can fluctuate by 10-20%. Therefore, to trade effectively, you should monitor upcoming event schedules.

Common Technical Indicators

Bollinger Bands - Identifying Support and Resistance

Bollinger Bands consist of a middle moving average (MA) line and two outer bands (±20% of the MA value). The upper band acts as resistance, and the lower band as support.

A simple strategy is to buy when the price touches the lower band and sell when it touches the upper band. However, you should verify success rates before applying in real trading.

Moving Average (MA) - Trend Identification

Moving averages are widely used to determine short-term and long-term trends. The 50-day and 200-day MAs are commonly used to identify long-term trends and support/resistance levels.

Trading signals:

• When the 50-day MA crosses above the 200-day MA ⟹ price is likely to rise
• When the 50-day MA crosses below the 200-day MA ⟹ price is likely to fall

RSI - Overbought/Oversold Detection

RSI ranges from 1 to 100 with three key levels: 30, 50, 70.

• RSI above 70: stock is overbought, likely to decrease
• RSI below 30: stock is oversold, likely to increase
• RSI crossing 50: helps clarify the current trend

For example, with Bitcoin, each time RSI hits the 70 zone, the price tends to fall; near 30, the price bounces up.

MACD - Reversal Detection

MACD combines moving averages with a histogram. Simple trading signals:

• Buy when the histogram shifts from red to green
• Sell when the histogram shifts from green to red

Stochastic - Volatility Measurement

Stochastic consists of two lines: the stochastic line and a 3-period moving average.

• Stochastic above 80: overbought
• Stochastic below 20: oversold

A simple strategy is to buy in oversold zones and sell in overbought zones, similar to RSI.

Conclusion

Understanding how to read stock charts is an essential foundation for participating in the market. The Japanese candlestick chart provides the most information and is favored by traders.

The three most basic elements when viewing a chart are: price trend, support/resistance levels, and trading volume history. More advanced, you can combine technical indicators to make more accurate decisions.

However, no indicator is 100% accurate. Therefore, always verify the success rate of each signal before using it for trading. Combining technical analysis, risk management, and practical experience will help you become a successful trader.