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Stock Market Investing: How to Conduct a Chart Analysis

Before I get into the how-tos of conducting a chart analysis, I want to clear a few misconceptions about stock market investing.

A lot of wannabe stock traders still maintain the belief that investing in stocks is a major risk and you have no control over the process. But this is furthest from the truth. You can get started right now with just a $100. You don’t need to put your life’s savings at risk; as you have to in real estate investment.

How to read a basic line chart?

line chart

This is a sample line chart of the Dow Jones industrial average. The Y-axis(vertical line) represents the price of the stocks and the X-axis(horizontal line) is the timeline from 1900 to 2020. Over the course of 100 years, the stocks have advanced steadily from $0 to $26,000. It’s basically a J-curve; nothing much is going on until 1980 and there is a sudden rise in demand for products manufactured by the top 30 publicly owned companies based in the United States.

Due to a swift rise in the demand for the products, the price escalates dramatically between the year 1980 and 2020. As you can see there is a dip in the stock prices around the year 2008. This is due to inflation during that period. During this period, prices of products increased but the purchasing power was weak. Hence, the stock prices crumbled from $14,000 to $7000. This was a calamitous situation for the stock owners at that time.

Candlestick chart

candlestick chart

To conduct a chart analysis, understanding a candlestick chart is equally important. So, the X and Y-axis of the candlestick chart represents the same things as that of a line chart. The only difference is, instead of a plain curve there are red and green candles. Each candle represents a single day in the timeframe. This chart is a zoomed-in version of the previous chart and provides in-depth information about how the stock prices are changing day after day.

You must be wondering why some candles are green and others are red. Well, the green candle indicates that the stock prices closed higher from the day before. In the chart, if you look at July 16, there is a steep increase in the stock price(from 19 to 22). A day before(that is on 15th of July), the stock prices were lower than 20 and hence it is represented by a red candle. I am hoping you are understanding how candlestick representation works. It’s not that complicated actually.

When do people buy and sell stocks?

As you would already know, stock prices of a company increase with the increased demand for its products. And they fall when the demand is low. The lowest point at which the stock price fall is known as “support“. Usually, stock prices reach this level and stay there until the demand for the products increase. In some cases, they do fall beyond the support level and reach the next support level.

Likewise, “resistance” is the point at which the value of stock reaches its peak and bounces off after a while. You should look to sell your stocks when the price is near the resistance level and buy them when the price is near the support level.

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