Stock Chart Basics
A stock chart shows how a stock price has moved over time. While day traders use complex chart patterns to make short-term bets (usually unsuccessfully), long-term investors benefit from understanding basic chart concepts to make informed decisions about when to buy and how to evaluate investments.
Key Elements of a Stock Chart
- Price line/bars — Shows the stock price over your selected time period (1 day, 1 month, 1 year, 5 years, all-time). Candlestick charts show open, high, low, and close for each period. Green = price went up that day, Red = price went down
- Volume — Bars at the bottom showing how many shares were traded. High volume on price increases = strong buying interest. High volume on price decreases = strong selling pressure
- Moving averages — Smooth out price fluctuations to show the trend. The 50-day and 200-day moving averages are most commonly used. When the stock is above its 200-day moving average, it is generally in an uptrend
- Time period — Always look at multiple timeframes. A stock crashing on a 1-week chart might look like a small dip on a 5-year chart. Long-term investors should focus on 1-year and 5-year charts
What Long-Term Investors Should Look For
- Long-term trend — Is the stock generally moving up over 5-10 years? Consistent upward trend indicates a strong company
- Drawdowns — How much did the stock drop during crashes (2020, 2022)? How quickly did it recover? Smaller drops and faster recoveries indicate resilience
- Comparison to index — Compare the stock performance to the S&P 500. If it consistently underperforms the index, you might be better off in an index fund
- Do not overthink charts — For long-term index fund investors, charts are mostly irrelevant. Dollar-cost averaging into a total market index fund means you do not need to time anything. Charts are more useful for individual stock analysis