The Basics of Understanding a Wanderer Chart
The first time anyone glances at a stock's chart their eyes glaze over. It's a lot of information packed into a small package. And for many, the information included in there is in what is essentially a foreign language. However, like with a foreign language, learning just a few key words and phrases goes a long way. Before you know it, you'll look at a stock's chart and it will tell you a story about where the stock has been, where it is now, and potentially even where it is headed.
Ticker
A ticker is a short abbreviation of a company's name, usually easily identifiable, that is used to represent the shares of a publicly traded company. In the example above you can see MSFT in the middle of the chart to represent shares of Microsoft Corp.
X-Axis = Date/Time
The bottom x-axis of a chart is used to show time. This can be virtually any time period—minutes, hours, days, weeks, or months. The width of the chart can also be adjusted to show different lengths of time.
Y-Axis = Stock Price
The y-axis of the chart represents the stock's price.
Candlesticks
Candlesticks are the vertical red and green lines that go across a chart. Each one represents a period of time. In the example above we are looking at a Daily chart, so each candlestick represents one trading day. The candlestick, though a simple design, gives us a lot of information. Each candle shows us the opening stock price, the closing stock price, the highest stock price, and the lowest stock price of the time period being displayed. Click here for a more detailed explanation of candlesticks.
Moving Averages
A moving average depicts the average price over a specific number of periods, showing this as a single line which helps to highlight the overall trend direction during that period. For example, the chart above is a Daily period chart, so the purple line that represents the 20-Day Moving Average represents the closing price each day, divided by 20. This gives us a smooth line that, in this example, shows that the recent trend is headed down. The 50-Day Moving Average, which is more of a medium-term average, is trending higher, and the 200-Day Moving Average, considered long-term, is flat. Moving averages are widely used by traders as areas to watch for support or resistance in a stock's price. They can also work as an indicator to help reinforce a trader's opinion of a stock. Click here for a more thorough explanation of moving averages.
Earnings and Ex-Dividend Date
At the bottom of the Daily chart you can see periodic E and D symbols. These represent Earnings Dates and Ex-Dividend Dates. Every quarter public companies are required to report earnings. The numbers released on this day, as well as the forward guidance often given at that time by the company, often cause large moves in the stock price, both up and down depending on the numbers. It's important, especially when making what you think will be a short-term trade, that you are aware of when the earnings date is and understand the increased risk (and potential reward) that comes with owning stock on that day.
Ex-dividend day shows us the day that a dividend will be paid out to current shareholders. If you own stock on this day you will receive the dividend. Quite often, the price of a stock will decrease by the amount of the dividend being paid on these days. This is because dividends are paid out of a company's cash, and thus reduce the overall value of the company by that amount. You can read more about dividends here.
More Information
This post was intended to give you some of the broad strokes of how to understand a chart. But there is always more to learn. If you're interested, we've listed a few more resources below that will help you start to see a stock's chart as a blueprint.
Wanderer Financial Indicator - Our own buy and sell signal based on a stock's momentum.
Support and Resistance - Important price levels that often present good places to buy and sell a stock.
Trendlines - Knowing where a stock is in relation to an overall longer-term trend can be very useful.
Swing Highs and Lows - A helpful indicator to determine when a stock's rise or fall has run its course.
If you haven't already, join us at Wanderer Financial for tons more learning opportunities like these.
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