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.
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).
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.
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.
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.