Many stock options courses do not fully explain how to effectively read stock charts for options trading. Without the proper education in how to read stock options charts you are keeping your investments from reaching their maximum profit potential.
Stock options come from, or are derived from the value of stocks, and it is essential to realize how the cost of a security affects your option’s value. When you are charting stocks, you are collecting data – the cost of the security – and the plotting of that data in a way that you can allow you to see the big picture for that equity.
You will need to devise a trading plan that is based on how the stock looks and trade in the direction of the trend. These stock charts will protect you from losses and further your gains in options trading. You have to first comprehend the basics of reading stock charts in order to fully profit from what the chart is telling you.
What Is A Stock Chart?
A stock chart is designed to be a graphical representation of the price of the security over a specified amount of time. You will be able to see at a glance how a security has moved over time.
Depending on your style of trading, each type of chart – candlestick, line, and bar – will serve its own unique function. All three types of stock charts do nothing more than show the buying and selling patterns of the traders.
These patterns are difficult to pick out by reading stock quotes online, or in a newspaper. This is the reason that stock charting has become priceless.
The Four Major Areas On Every Stock Chart
When you are becoming familiar with stock charts, there are four major areas you should familiarize yourself with:
- Identification Section
- “X” & “Y” axis
- Volume Bars
- Time Frame
In the identification section, the basic information on a security will be outlined. This includes the name of the company, which exchange it is traded on, its trading symbol, and the current date. Also included will be the day’s price change – the opening price, the day’s high and low, and the closing price.
How many shares of the stock were traded in a specific time frame, or volume, will also be included in the identification section of a stock chart, as well as the day’s change compared to the previous trading day’s closing price.
Time Frame And Volume Bars
The stock chart will also display the time frame you are looking at – twelve months, six months, etc. – and it is recommended that you adjust the time frame to suit your trading style. For a short term investing strategy, a 3-6 month chart is required, and a 1-5 year chart is needed for a long term plan.
Volume is often cited for being the heart of the equities market. Volume is a main signal of supply and demand. When you look at the volume bars you can better understand the power behind the stock price fluctuations. If a stock is gaining on heavy volume is considerably more apt to maintain gains than a stock that is moving upwards on light volume.
The “X” And “Y” Axis
The “X” axis is the lower component of the graph, running horizontally, and it flowing left to right. It is the component of the graph that has the time frame that you are looking at. On the left side is the past and the right is the stock’s present time frame. You want to use the past as a reference, however, always trade from the right side of the chart. You should trade what you see now.
The “Y” axis is the right side of the chart, running vertically, and flows top to bottom. This portion of the graph has the price action.
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