Almost everything you need to know about a stock can probably be determined by taking a long, analytical look at the stock's price chart. Many stock market traders believe that it's possible to look at a stock market chart and determine what direction it will take, as well as the strength of the move, and use that information to make better trades. Learning how to read and interpret a stock chart is the basic fundamental building block for technical analysis.
Technical analysis is a common method used to evaluate stocks. It revolves around chart analysis of market statistics, starting with the historical price and the trading volume. There is nothing magical about a price chart; it is simply a sequence of prices plotted over a specific time frame, typically days, to measure a stock's movement. The chart makes it easier to look at how a stock has moved over a period of time and see if might be trading near an important spot, such as an all-time high or low, a 52-week high or low, or a support or resistance level.
In addition to the basic price and volume information that's available on a price chart, traders will often incorporate additional indicators into their analysis. They can determine potential trends by using moving averages (both simple moving averages and exponential moving averages are useful) and often use Bollinger Bands to determine market pressure and potential spots where the stock could pop upward or downward.
There are hundreds of technical indicators on the market today, but wise and experienced traders limit their involvement to a handful of indicators. Too many indicators can cloud the picture and often contradict each other, which can lead to a malady known as "paralysis by analysis." This simply means that the amount of information confuses a trader to the point that they are unable to make a decision.
The idea behind examining a stock market chart is to make a smart decision on whether to buy the stock or pass on it. By using the information and tools that are available, it is possible to make an intelligent – and profitable – decision.
