Reading chart is essential to be able to take good entry and exit position based on previous price actions. It is important to understand that when you are reading the chart, you are looking at previous specific price with which the stock was exchange between buyer and seller. Theses previous buyer-seller price action allows us to find good support and resistance level to trade with. A support level on the chart is a price range where there will be more buyers than sellers, therefore at that level, the stock price will have less chances of descending. A resistance level on the chart is the opposite. That is, it is a level where there are more sellers than buyers. Other indicators also help to read a chart in a more technical aspect such as volume, relative strength index (RSI), moving average convergence divergence (MACD) and much more.
To learn more about how to read trading charts, the following topics will be covered: reading a candlestick, time interval, chart range, chart style, premarket & after hours.
As shown on the image above, the main characteristic that determines if a candlestick is green or red is the direction in which the closing price will be located in respect to the opening price.
If the closing price is above the opening price, as seen on the left side of the image above, it is a green candle.
If the closing price is below the opening price, as seen on the right side of the image above, it is a red candle.
Example 1. Two Candlesticks
In the illustration of example 1, you can see at the bottom that each candlestick represents a minute. This means each candlestick covers a time frame of 1 minute. To be more specific the first green candle represents the price action from 1:45 PM to 1:46 PM and the second red candlestick from 1:46 PM to 1:47 PM.
For the green candle, the price opened at $19.92. Within that minute of trading, the stock price fluctuated from a low of $19.90 to a high of $20.04. At the end of this minute, the stock price was at $20.02 and this is called the closing price.
The candle of the following candle thus starts at the closing price of the previous candle, that is, $20.02$. Between 1:46 PM and 1:47 PM, the stock went from a high price of $20.06 to a low of $19.98 before closing at $19.99.
The green candle has a gain of $0.10. The red candle has a loss of $0.03. The average gain of both of these candles will be $0.07
Time interval, also called time frame on some brokerage, is the time span of each unit on the x-axis of the graph. In a candlestick graph style, it is the time frame of each candlestick. So, for a 1 minute time frame, each candlestick represents 1 minute, for a 3 minute time frame, each candlestick represents 3 minutes and so on.
The purposes of having multiple time intervals are to be able to evaluate the price action over different point of views. For example, the day trader would like to see the overall trend of the stock for the previous few days by looking at the 4 hours time frame chart and then switch to the 1 minute time frame to perform some day trades. Moreover, it very hard to visualize and display a 1 minute price action over the past 5 years of a stock price. In this case, it is easier to display a time frame of 1 day candlesticks.
There is not one time interval that is better than another. Instead, each time interval is a tool to study the chart from different time frames. Each day trader has their own style and preferred time frame to trade with.
The chart range is the time span that you wish to study. This option is not available on every brokerage, but this simply allows to display the time range you wish to see. For example, 5d chart range will display the past 5 days of trading activity. The time interval will be chosen automatically by the brokerage algorithm. However, you can change the time interval if you wish too.
This is not a mandatory option to use since you can always choose the time interval you want to study and move the chart around according to your liking.
The chart style is the type of chart that you need to use if you want the price action to be displayed. The 3 main types are the line chart, candlestick chart, and bar chart.
1. Line Chart Style
The line chart representation is a line that represents the closing price at the end of selected time interval. In the example above, the diagonal line represents the closing prices at the end of 1:45 PM and 1:46 PM (each end of the line aligns with the end prices on the x-axis). Compared to the candlestick style and bar style, the line chart style does not provide enough information.
The other styles will provide us with the opening price as well as the highest and lowest price during that entire minute. The line chart style only give us the closing price and using that value, we can figure out the opening price by looking at the precious value.
2. Candlestick Chart Style
The candlestick chart style utilizes candlesticks to display the price action battle during the selected time interval. This chart style provides for every candlestick the opening price, closing price, the highest price and lowest price during the time interval of trading.
This chart style is the most commonly used one since not only does it provide the same amount information as the bar charts do, but visually it is easier to understand.
3. Bars Chart Style
The bar chart style is a method that displays the price actions in the form of bars. The opening price is indicated by the horizontal bar to the left side of the vertical bar and the closing price by the horizontal bar to the right side. Most common bar charts styles are the OHLC and the HLC. As their names indicate, the OHLC style covers the opening, highest, lowest, and closing price. The HLC provides the highest, lowest, and closing price.
This method provides the same amount of information as the candlestick chart style. Although, this style is less used than the candlestick style and less pleasing visually.
Pre-market and After-hours
The time meant as pre-market and after hours are the time period prior of the opening of the bell at 9h30 AM and the closing of the bell at 4 PM. The pre-market session starts at 4 AM and ends at 9h29 AM. The after-hours session starts at 4h01 PM and ends at 8 PM.
The pre-market and after-hours sessions are not accessible to all brokerages; Some brokerages allow to trade only during regular trading hours and some other brokerage may give access to trade for a few hours in the pre-market and after-hours.
Being able to read the chart during those pre-market and after-hours sessions is essential to be able to study the overall trend of the stock price. It is a way to evaluate and study trend, prior to trading. Some major moves also happen during the after-hours, for example when there is an earning report released at the market close at 4 PM.