Contents
Stock Trading vs. Stock Investing
Should You Trade Stocks?
A Trader’s Guide to Stock Markets
How to Get Started Trading Stocks
How to Make Stock Trades
How Stock Charts Work
How to Analyze Trends, Support, and Resistance in Stock Charts
How to Use Technical Analysis Indicators to Analyze Stock Charts
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Next: How to Use Technical Analysis Indicators to Analyze Stock Charts |
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How to Analyze Trends, Support, and Resistance in Stock Charts
Traders tend to do two types of analysis on stock charts. The more complex and intricate type involves the use of technical analysis indicators that help traders predict where the share price of a stock might go next. A more rudimentary form of stock chart analysis involves spotting trends and support and resistance levels.
Trends
A trend is a consistent pattern of movement in a stock’s price over time. A trendline is created by drawing a line from a particular point on the chart to another. Trends can be up or down:
- Uptrend: Occurs when a trendline shows a steady increase in a stock’s share price
- Downtrend: Occurs when a trendline shows a steady decrease in a stock’s share price
Traders analyze charts to find reversals, points at which it looks like a stock’s trend might be changing. If a trader spots what looks like the beginning of a new uptrend, the trader would likely buy the stock. If a trader thinks a new downtrend is forming, the trader would likely either sell the stock (if he or she owns it already) or sell the stock short (see below).
Selling Short
Selling short (also called simply shorting) is a type of trade in which a trader “borrows” shares of a stock that he does not actually own and immediately sells them, with a commitment to buy them back later. In doing so, the trader can profit if the stock’s share price declines. Since selling short is very risky, it’s best to avoid this type of trade entirely, unless you’re an experienced trader or investor.
Support and Resistance Levels
When a stock is following a trend, typically it will trade within a narrow range of prices around the trendline, occasionally testing the extremes of that range.
- Support level: The price represented by a line drawn through the lowest points below the trendline
- Resistance level: The price represented by a line drawn through the highest points above the trendline
Traders examine support and resistance levels to identify breakouts, points at which a stock seems to be falling through its support level or moving upward through its resistance level. Traders often buy when a stock breaks through its resistance level, since they believe that this breakout may indicate the beginning of a new uptrend. On the contrary, traders often sell when a stock plunges through its support level, which they believe tends to signal the beginning of a new downtrend.
| Acknowledgments & Disclaimer |
