Basics About Stock Chart Candlesticks And Volume
Stock charts have a language all to themselves. They are always saying something about the balance between the buyers and sellers, and the various levels of Market Participant Groups in the stock. When you can read the stock chart and understand what it is revealing about the stock and the company, then consistency in selecting good stocks to trade will increase significantly.
What is wrong with the Stock Chart example below?
What are the Candlesticks telling us about this stock?
The tiny Price gains per day and the very low Volume in the bottom chart window reflect illiquidity. It is very important to choose stocks that have strong liquidity. What I mean by this is that if very few shares are trading hands day to day, it will be more difficult to enter and exit a short term trade and get a good execution on the trade. Illiquid stocks tend to fill poorly meaning the buyer often pays more than they should when buying the stock, and get far less than they may think when selling the stock.
It is a common problem for new beginner and novices retail traders to ignore Volume and Liquidity, and only focus on Price action. Sure this stock moved up, but how much did it actually move in terms of points in the entire month? There are insufficient points to make good profits on short term trades that have low Liquidity. The risk for the chart example is very high because there is no support nearby as it moves only 44 cents, so you could end up losing money if you entered this stock with a Market Order.
Let’s say you bought this stock because you saw it was running. You were executed with a Market Order. Even though the stock did move up if you had held it until the end of the month and sold it, you would have taken a loss even if you sold it at the high for the day because there are transaction fees that add costs to the trade.
Make sure when selecting stocks to always check the liquidity, by looking at the Quantity aka Volume of shares traded in the past few weeks. Volume is usually truncated on most charting software so you need to add 2 zeros. Clearly as indicated by the low Volume smart money was not trading this stock, and you should avoid trading stocks like this too.
I invite you to watch an introductory video about Stock Charts on my TechniTrader website. Regardless of your trading style: intraday, day, velocity, swing, position trading or long term investing learning how to read Charts is a critical skill. When you can interpret a Chart correctly, you will be able to anticipate the direction the stock will take, how long the run will sustain, and how fast the stock will move. With this information you can determine the correct trading style to use, the strategy to use, the correct entry price, the stop loss placement & exit strategy before you ever enter a stock.
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Stock Charts Explained by TechniTrader
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Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.Chartered Market TechnicianInstructor and Developer of TechniTrader Stock & Option Markets Courses
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