How to read a Price Graph

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A stock’s price graph is one of the tools a stock trader or investor needs to understand to make that decision to buy or sell.


Price graph is a historical data showing the price movement of a stock. In technical analysis price is the driving factor that makes an investor or trader buy or sell. Stock investors and traders have different techniques in their stock picking. Some buy when the stock price is below their valuation, some buy when the stock is about to go north, and some buy when the stock indicates a downtrend.

You might ask how in the world did they know that? They are able to do that by interpreting the price graph.


Again let me re-iterate that nobody can predict stock movement; only a probable trend can be made based on what is the current market demand-supply level.

Let us use the below price graph and other graph of CHIB as our example.

Most charting software has three to four graphs. The above is take from Citiseconline’s charting in there website.


The graphs in the above picture are:
1. Price graph
2. Volume graph
3. MACD
4. Stochastic


Now let us focus on the Price graph



Legend:
SMA3 – Simple Moving Average 130 days
SMA2 – Simple Moving Average 65 days
SMA1 – Simple Moving Average 32 days
CHIB – Stock Code


Simple moving average as the name says is the average price of the stock for the specified number of days. So in the legend SMA1 is nearly the average for a month, SMA2 is for 2 months, and SMA3 is for nearly 5 months.


Why are these important?


These are used as indicator meaning they give an idea where is the direction of the stock. It also defines where are the possible support and resistance. I know these words seems gibberish, click here and here to know more.

Now you know that the 3 SMA’s are the average of the stock’s price for a certain period, compare such averages to the current price. If the Current price is above all it indicates that the stock going stronger thus it surpasses its average prices. This means the stock’s price is trending up thus a good time to profit when you already have the stock. You can hold the stock for a while or as you wait for it to reach your estimated target price(which you can set by using some stock computation tool). Sell when the stock has reached your target price.

On the other when the current price crosses below the averages it means its price is trending down. If you have bought the stock lower than the current price it could be a good chance to take profits. But if you have bought it while it was above the average it is the best time to cost average. 


With this knowledge also remember that you have to verify such price trend. This could be verified in the Volume graph. The volume graph indicates the activeness of the stock. If the current price crosses the averages upward but there is no increase in volume then such movement is not verified thus it could only be that the stock is being played or such price uptrend is just circumstantial.


Other indicators are always included for further verification. MACD or Moving Average Convergence Divergence indicates whether the stock price has a bigger or smaller price change while Stochastic indicates whether the stock is overbought or oversold.

Again nobody can predict the exact movement of the stock; only probable outcomes. The price graph is a guide but no matter what happens it is still your call as an investor or trader to chose sell or buy button.


(I would like to thank my mommy Krissy for the volume verification, Tatay John316 for lessons on when to buy and sell, and Johnny Rocky for his explanation on the moving average)


Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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1 comment for “How to read a Price Graph

  1. Anonymous
    December 7, 2011 at 4:55 pm

    i suggest you add a button for share

    ___________________________________________hermes price

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