How to Read Stock Charts: A Complete Guide

For some, stock charts look like abstract paintings—random lines, bars, and numbers thrown onto a screen. To others, stock charts hold valuable data that provide insight into market conditions. Regardless of where you stand, every trader should understand how to read stock charts.

Analyzing stock charts can help you spot economic or stock market price trends, identify support and resistance levels, and anticipate breakouts or reversals. You'll make more informed decisions if you can discern trading patterns hidden within chaotic data, starting with learning stock chart types, components, and terms.

What is a stock chart?

Stock charts visually represent stock price movements over a specified period. By plotting price data on a graph, stock charts synthesize large numerical datasets into intuitive visual aids.

Along with price, stock charts can also depict other data, including trading volume, earnings releases and dividend dates, and volatility. Some charts display technical indicators, like moving averages or stochastic oscillators, alongside price data, whereas others show non-price data in separate graphs or tables below the main price chart.

Stock chart components

Although a stock chart’s components vary depending on the chart type, certain elements are uniform across most trading platforms.

1. X-axis (horizontal axis)

The X-axis displays the timeframe for the plotted stock price data. Periods can range from minutes to years depending on the chart and an asset’s age.

2. Y-axis (vertical axis)

The Y-axis measures a stock’s price. A chart can display prices using a linear scale (equal space between prices) or a logarithmic scale (equal space between percentages of change).

3. Price bars and candlesticks

Price bars and candlesticks depict a stock’s price range throughout a single time interval. Bars and candlesticks contain two parts: a vertical body and either vertical lines (candlestick) or horizontal lines (bar).

The body displays the open and close price on a candlestick, while the lines (wicks) represent the high and low during that interval. On a bar, the body indicates the high and low price, while the lines show the open and close price.

4. Trendlines

Trendlines connect price points on a chart. Drawing trendlines can help you recognize uptrends (connected higher low points), downtrends (connected lower high points), and potential resistance levels (price points that an asset struggles to break through).

5. Technical indicators

Commonly used in technical analysis to forecast market movements, technical indicators measure stock momentum, volatility, liquidity, and volume. Learning how to read charts requires understanding indicators such as moving averages, moving average convergence divergence (MACD), relative strength index (RSI), and average true range (ATR).

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Stock chart terms you should know

If you want to know how to read stocks, you must understand the following chart terms:

Market capitalization

Market capitalization represents the total dollar value of a company’s outstanding stock shares. You calculate a company’s market cap by multiplying total outstanding shares by the market price per share. Investors use market cap to identify a company’s size (large-cap, mid-cap, or small-cap) and evaluate its performance compared to competitors.

Price-to-earnings (P/E) ratio

The price-to-earnings (P/E) ratio relates a company’s stock price to its earnings per share (EPS). A high P/E may indicate overvaluation or predict high future growth rates, whereas a low P/E suggests undervaluation. Investors often compare a company’s P/E ratio to similar companies or historical records.

52-week high and low

The 52-week high and low refer to a stock’s highest and lowest traded prices in the last year. These prices offer insights into a stock’s value, potential price movements, and resistance levels.

Open, high, low, and previous close

A stock’s open, high, low, and previous close refers to the following:

• Open: the price when the trading day starts

• High: the maximum price reached during the trading day

• Low: the minimum price achieved during the trading day

• Previous close: the price when the prior trading day ended

Bid, ask, and spread

Charts and trading platforms typically use two-way price quotations that contain a bid and ask price. The bid represents the highest price buyers will pay for a stock, whereas the ask represents the lowest price sellers will accept.

Investors often view a stock’s spread—the difference between the bid and ask—as a critical liquidity metric. The narrower the spread, the greater the liquidity.

Beta

Beta compares a stock’s volatility to the broader market. A beta above 1.0 indicates higher volatility than the overall market, while a beta below 1.0 suggests lower volatility. Investors primarily use beta when evaluating a company’s short-term risk.

Earnings per share (EPS)

EPS is a company’s net profit divided by its outstanding common stock shares. The higher the EPS, the greater the profit per share, which may suggest greater value. You can calculate EPS using the trailing 12 months (TTM) or release method.

• EPS TTM: calculates average EPS over the past 12 months

• EPS release: estimates future EPS using a company’s quarterly or annual earnings report

Volume and average volume

Volume refers to the total shares bought and sold during each trading interval. Average volume is the average number of shares traded over a specific timeframe.

Investors typically use volume and average volume to determine the strength and meaning of trading chart patterns. High volume may indicate a strong trend, whereas volume spikes may align with significant market news or company events.

Types of trading charts and how to read them

Stock price charts come in three basic types:

1. Line charts

A line chart connects a series of data points—typically closing prices—with a continuous line. Although line charts can help investors spot historical price trends, they lack sufficient detail for in-depth pattern recognition or analysis.

2. Candlestick charts

Developed in 18th-century Japan, candlestick charts depict price movements during a specific period, including the open, close, high, and low. Candles use fill and color to indicate price direction and changes.

A solid candle means the close price is lower than the open price for the same period (bearish candle), whereas a hollow candle means the close price is higher than the open price (bullish candle). Most traders use green or white for bullish candles and red or black for bearish candles.

Investors use candlestick charts when analyzing price movements and timing trade entries and exits.

4. Bar charts

Like candlestick charts, bar charts capture price changes over a specific timeframe. A bar’s top indicates the highest price during the trading period, while its bottom indicates the lowest price. The horizontal lines on the bar’s left and right sides indicate the open and close price, respectively.

Stock chart patterns

You should recognize the following trading chart patterns:

Head and shoulders

The head and shoulders pattern displays three peaks: a higher peak—the head—between two lower peaks—the shoulders. This pattern may signal a bullish-to-bearish trend reversal or a bearish-to-bullish trend reversal when the peaks are inverted. Depending on the pattern, the neckline acts as the support or resistance level and signals when to enter or exit a trade.

Double top and double bottom

A double top pattern forms when a stock reaches two price peaks separated by a modest trough. Conversely, a double bottom has two troughs separated by a small peak. Investors often interpret these patterns differently depending on how they break:

• Break below support level on double top: possible sell signal and bearish trend reversal

• Break above resistance level on double bottom: possible buy signal and bullish trend reversal

Ascending, descending, and symmetrical triangles

Triangle patterns come in three basic types:

• Ascending triangle: formed by a horizontal upper trendline and a rising lower trendline (bullish indicator)

• Descending triangle: created by a horizontal lower trendline and descending upper trendline (bearish indicator)

• Symmetrical triangle: converging upper and lower trendlines (consolidation period before a breakout up or down)

Although traders classify ascending and descending triangles as continuation patterns, a breakout can occur up or down.

Pennant

Pennant patterns occur when a substantial price movement—the flagpole—is followed by a brief consolidation period with converging trend lines—the pennant. A breakout after the consolidation period in the same direction as the previous trend can indicate a strong buy or sell signal.

Flag

The rectangular-shaped flag pattern forms when an abrupt countertrend (the flag) occurs after a solid but brief price movement (the flagpole). A breakout in the previous trend direction before the consolidation period suggests a trend continuation.

Cup and handle

Cup and handle patterns sport a rounded bottom (the cup) followed by a small consolidation (the handle). Investors usually consider cup and handle patterns to be bullish signals.

Rounding bottom and rounding top

Rounding bottom and top patterns indicate opposite trends depending on the pattern orientation:

• Rounding top: “U”-shaped line (potential bullish reversal)

• Rounding bottom: inverted “U” shape (possible bearish reversal)

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