When investors log on to their brokerage platform to check up on
their favourite company, they will likely retrieve a stock quote. A
stock quote gives an instant picture of valuable information that
can’t be overlooked.
Typically, a stock quote will include several key data points, including:
- Last Trade: The dollar price representing the most recent transaction.
- Trade Time: The exact time corresponding to the most recent transaction.
- Change: Dollar amount and percentage change corresponding to how much a stock is up or down for the day.
- Previous Close: Dollar price corresponding to the stock’s final trade of the prior day’s trading session.
- Open: Dollar price corresponding to the stock’s first trade of the session.
- Bid: The highest price a buyer is willing to pay for a stock.
- Ask: The lowest price at which someone is willing to sell the security. When combined with the bid price information, it forms the basis of a stock quote.
Now that we have gone over the basics of reading a stock quote, let’s move on to reading a stock chart.
Unlike a stock quote, a stock chart tells a story of how a stock performed over a given period of time. The most common time frames include one day, five days, one month, six months, year-to-date (i.e. since Jan. 1), five years, and maximum.
The basic stock chart will display those price movements over a given period as well as the volume of shares traded during this time frame.
Investors can look at a stock chart to find patterns. This is known as technical analysis. These investors believe that the past price and volume changes of a security can provide insight into future price movements (history repeats itself).
● For example, if a chart shows that a stock tends to rebound when it drops to a certain level, short-term or swing investors may look to buy the stock at that price. Technical traders refer to this as a level of support.
● On the other hand, if a stock proceeds to fall without fail after rising to a certain level, then technical investors may look to sell their position when the stock reaches that price. This is referred to as a level of resistance.
*Source: Market-Q
Another example is moving average indicators which can be used to determine the directional trend and which, when they cross one another, may generate a trading signal (either bullish or bearish).
*Source: Market-Q
More advanced investors and traders look at charts to extract much more information. For example, the Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes. It can be used to identify the general trend of a stock and is displayed as an oscillator that can have a reading of 0 to 100. The RSI can help investors determine if a stock is overbought (over 70) or oversold (under 30) at any given time.
*Source: Market-Q
Another indicator used by traders is the MACD (Moving Average Convergence Divergence) which is used in determining trend direction, momentum and potential reversals.
Two lines compose the MACD: the MACD line and the Signal line which is a moving average of the MACD.
*Source: Market-Q
They move together, except that the MACD moves faster. A buy signal occurs when the MACD line crosses above the Signal line, and a sell signal occurs when it crosses below it. Most traders will use this signal in order to validate signals picked up from other strategies.
A chart illustrates the result of the forces at work in the market, i.e. buyers and sellers. In conclusion, investors should rely on a set of signals rather than on a single one before making a decision. They would also be well advised to use other methods—such as fundamental analysis—to validate their technical analysis.
