Beginners’ guide to reading stock charts

What exactly is a stock chart?

A stock chart is a visual representation of a stock’s price movements over time. It allows investors to analyze historical data and identify trends, patterns and potential entry or exit points for trades. Think of it as a snapshot of investor sentiment and market behavior, told in numbers and lines.

Note that, while charts can provide valuable insights, they don't guarantee future price movements. Market conditions can change rapidly.

Types of stock charts

1. Line chart
The most basic chart form. A line chart connects closing prices over a period with a simple line, helping you quickly see a trend. While they don’t show intraday price action or volatility, they offer a clean, uncluttered view of general market direction. This is popular among beginners or those focused on long-term trends.

2. Bar chart
Each bar shows the open, high, low and close for a given period. It’s more detailed than a line chart and helps spot volatility. Bar charts offer more depth by showing whether the price closed higher or lower than it opened, but can be less visually intuitive than candlesticks for some traders.

3. Candlestick chart
The most popular among traders. It’s a colorful and intuitive way to see market movement, with each 'candle' showing the open, close, high and low price. Red means the price went down; green means it went up. Candlestick charts help traders quickly assess market sentiment and identify specific formations that can signal reversals or trend continuation.

For example, imagine you’re watching a stock over a week. A line chart would show whether the price went up or down, but a candlestick chart would show you how much it fluctuated during each day.

Price charts paint a picture of a stock’s journey. For example, Apple (AAPL) often shows steady, long-term growth with occasional dips, which could be interpreted as stability. On the other hand, meme stocks such as GameStop (GME) can exhibit sharp spikes followed by rapid declines, making their charts look more erratic. 

These visual distinctions can help beginners quickly gauge whether a stock tends to move predictably or unpredictably. Even just seeing how a price moves can clarify whether you're looking at a volatile stock or a more stable performer.

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What are the key elements on stock charts used to identify trends?

Stock charts come packed with information. Here are the core elements you’ll encounter and how to make sense of them:

1. Axes for time and price

• The x-axis (horizontal) shows time, ranging from minutes (for day trading) to years (for long-term investing)
• The y-axis (vertical) shows the stock’s price

The axes work together to show the change in stock price over a period. You can quickly spot trends, whether short-term spikes or long-term growth patterns.

2. Volume indicators

Below the price chart, you’ll usually see bars that indicate volume or the number of shares traded during a period. High volume often confirms the strength of a price movement.

Pro tip: A price spike on high volume is more meaningful than one on low volume. It shows wide investor participation and market conviction.

3. Moving Averages (MAs)

A moving average smooths out price data to help identify trends. Common types:

• Simple Moving Average (SMA) shows the average of a stock's price over a set number of periods.
• Exponential Moving Average (EMA) gives more weight to recent prices for quicker trend detection.

Example: A 50-day SMA shows the average price over the last 50 days. If the current price is above this line, it may signal an upward trend. Traders often use combinations like the 50-day and 200-day SMA to assess longer-term direction.

Understanding these elements creates a solid foundation for reading any type of stock chart. It helps you go beyond the numbers and start seeing meaningful insights.

How do you read candlestick charts effectively?

Candlestick charts tell you four key things in a single graphic:

• Open price: Where the stock started trading during that period
• Close price: Where it ended
• High: The highest price traded
• Low: The lowest price traded

The body of the candle (colored section) shows the open and close. Wicks (thin lines) show the highs and lows. Green candles indicate the close was higher than the open (upward movement), while red candles mean the close was lower (downward movement).

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Key candlestick patterns to know

There are several different types of candlestick patterns, either representing bullish, bearish or neutral price action. 

Bullish candlestick patterns

Bullish reversal patterns include:

• Hammer: A small body at the top with a long lower wick. Typically appears after a downtrend, signaling a potential reversal upward.
• Inverted hammer: Small body at the bottom with a long upper wick. Despite the long upper shadow, this can be bullish when it appears after a downtrend.
• Bullish engulfing: A large green candle that completely engulfs the previous red candle's body, signaling strong buying pressure and potential upward reversal.
• Morning star: A three-candle pattern consisting of a long red candle, followed by a small-bodied candle (often a doji), then a long green candle. This is a strong bullish reversal signal.

Bullish continuation patterns include: 

• Bullish three-line strike: Three consecutive green candles followed by a large red candle that engulfs all three. Despite the red candle, this often signals continuation of the uptrend.
• Tweezer bottom: Two or more candles with matching lows, indicating strong support and potential upward movement.
• Rising three methods: A long green candle followed by several small red candles that stay within the first candle's range, then another long green candle continuing the uptrend.
• Three stars in the south: Three consecutive red candles with progressively smaller bodies and shorter lower wicks, suggesting the selling pressure is weakening.
• Bullish mat hold: Similar to rising three methods but with a small gap up after the initial green candle.

Bearish candlestick patterns

Bearish reversal patterns include: 

• Shooting star: The opposite of the hammer. A small body at the bottom with a long upper wick, indicating a potential downward reversal after a rise.
• Hanging man: Similar to a hammer but appears after an uptrend. The long lower wick suggests selling pressure and potential reversal.
• Bearish engulfing: A large red candle that completely engulfs the previous green candle's body, signaling strong selling pressure.
• Evening star: The bearish counterpart to morning star. A long green candle, followed by a small-bodied candle, then a long red candle, indicating potential downward reversal.
• Advance block: Three consecutive green candles with progressively smaller bodies and higher opens, suggesting weakening buying pressure.

Bearish continuation patterns include: 

• Bearish three-line strike: Three consecutive red candles followed by a large green candle. Despite the green candle, this often signals continuation of the downtrend.
• Tweezer top: Two or more candles with matching highs, indicating strong resistance and potential downward movement.
• Falling three methods: A long red candle followed by several small green candles within the first candle's range, then another long red candle continuing the downtrend.
• Bearish mat hold: The bearish version of bullish mat hold, with a small gap down after the initial red candle.

Neutral candlestick patterns

• Doji: The open and close are nearly the same. This suggests indecision in the market and often precedes a reversal.
• Gravestone doji: A doji with a long upper wick and little to no lower wick, suggesting rejection of higher prices.
• Dragonfly: A doji with a long lower wick and little to no upper wick, indicating rejection of lower prices.

Pro tip: Always use candlestick patterns alongside other indicators to confirm a trend before making a decision. No single pattern is foolproof. Pay attention to the context – reversal patterns are more reliable when they appear after significant trends, while continuation patterns work best during established trends.

How do you identify and use stock chart patterns?

Once you understand chart basics, the next step is recognizing patterns, i.e., recurring shapes that suggest future price behavior.

1. Support and resistance levels

Support is the price level where a stock typically stops falling and rebounds due to increased buying interest. Resistance, on the other hand, is where a stock usually stops rising and begins to fall due to selling pressure. These levels act like invisible barriers on a chart and understanding them helps traders time entries and exits more effectively.

Support and resistance aren't always exact points, they’re more like flexible zones. A stock might bounce just above or below a support area several times before making a clear move. This is why many traders refer to them as 'zones' rather than fixed lines.

There are different ways to identify support and resistance:

• Historical levels, where previous highs and lows often become future barriers.=
• Moving averages, where popular averages like the 50-day or 200-day can act as dynamic support or resistance.
• Psychological prices, where round numbers (like 100 or 1,000) often act as informal resistance or support zones because traders tend to place orders at these levels.

Pro tip: The more times a stock touches a support or resistance zone without breaking it, the stronger that level becomes. A break with high volume often signals a strong move in that direction.

2. Popular chart patterns

Head and shoulders
This pattern looks like – you guessed it – a head between two shoulders. It typically appears after an uptrend and signals a potential reversal to the downside. The 'neckline' is a key level. Once price breaks below it, a further drop is often expected.

Inverse head and shoulders
The mirror image of the above. It appears after a downtrend and signals a potential shift to the upside. Traders often look for a breakout above the neckline with volume confirmation to enter long positions.

Double tops and double bottoms
A double top occurs when price hits a similar high twice, failing to break through and often signals bearish reversal. A double bottom is the bullish counterpart; the price tests a support level twice and bounces, suggesting a move higher.

Triangles (ascending, descending, symmetrical)
Triangles form when price action consolidates, making higher lows, lower highs or both.

• Ascending triangles typically signal bullish breakouts.
• Descending triangles often point to bearish breakouts.
• Symmetrical triangles can break either way, so volume and trend direction are key context clues.

Pro tip: Chart patterns work best when combined with indicators and volume. A breakout backed by strong volume carries much more conviction than one on low activity.

What indicators should you use when analyzing stock charts?

Indicators are mathematical tools that interpret price and volume data. Think of them as extra layers that add clarity to your chart analysis. On trading platforms, you can add these indicators directly to your charts. For beginners, indicators help simplify market movements by generating signals based on historical data – for example, highlighting trends, momentum or potential reversals.

1. Relative Strength Index (RSI)

RSI measures how overbought or oversold a stock is, on a scale of 0 to 100.

• Above 70 = overbought (possible pullback)
• Below 30 = oversold (possible rebound)

Example: If a stock has been climbing fast and RSI hits 75, it might be due for a short-term dip.

2. MACD (Moving Average Convergence Divergence)

MACD shows the relationship between two EMAs (usually 12-day and 26-day) and signals momentum shifts.

• When the MACD line crosses above the signal line = bullish.
• When it crosses below = bearish.

It's popular because it can highlight changes in trend direction before they become obvious.

3. Bollinger Bands

These are three lines; one in the middle (SMA) and two others above and below it. They measure volatility.

• When bands tighten = low volatility (possible breakout ahead)
• When bands widen = high volatility (expect swings)

4. Moving Averages (MAs)

As discussed earlier, simple and exponential moving averages are key for spotting trends. Use them to gauge momentum and potential reversal points.

Pro tip: Use RSI to check momentum, MACD for trend direction and Bollinger Bands to assess volatility. Together, they paint a fuller picture.

How can you read stock charts like a pro?

Reading stock charts like a seasoned trader involves combining what you’ve learned, i.e., patterns, indicators, volume and context.

1. Combine multiple indicators

Don’t rely on just one. For instance, a bullish candlestick pattern backed by rising volume and a low RSI is a stronger signal than any alone.

2. Watch out for these common mistakes

• Using too many indicators. This can create too much noise on your charts and become confusing
• FOMO trading: Chasing trends or reacting too late can cause more harm than good
• Forgetting about volume: Price moves are much stronger when volume supports them; don’t follow price spikes on low volume

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FAQs about stock charts

Are chart patterns reliable?

They can suggest what might happen, but they’re not guarantees. Use them alongside indicators like RSI and MACD and always consider the bigger economic picture.

Do stock charts include dividends?

Most price charts don’t include dividend payouts. If you want to see total return (price plus dividends), you’ll need an adjusted chart – something that Crypto.com offers.

Do stock charts repeat themselves?

Patterns can recur because of human psychology. Fear and greed drive similar behaviors. But outcomes vary, so treat charts as helpful tools, not crystal balls.

Why are some stock charts logarithmic?

Logarithmic charts show percentage change instead of raw price, which is useful for visualizing long-term moves in high-growth stocks. A $10 to $100 move looks dramatic on a linear scale, but log scale shows the growth rate more accurately.

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