How to Read a Stock Chart, and What Charts Cannot Tell You

A chart is a record of what price did, and usually how much volume traded while it did it. That's all it is. It isn't a crystal ball and anyone selling it as one is selling something else.

The usual objection to technical analysis is that you can't predict the future from past prices. That's true. It's also beside the point, because prediction isn't the job. The job is to read what buyers and sellers are doing right now, with real money, in real time. That's a different question, and it has answers.

Here's how to read one without pretending it tells you more than it does.

Start with candlesticks

Six chart types get used regularly. Candlesticks are the one to learn first, because they pack the most information into the least space.

Each candle covers one period. You choose the period: a minute, an hour, a day, a week. The thick part, the body, spans the open to the close. The thin lines above and below, called wicks or shadows, reach to the high and the low. Green or white means the close came in above the open, so buyers won that period. Red or black means the opposite.

That's the whole encoding. Once you see it, a chart stops being a squiggle and becomes a sequence of small contests with a winner in each one.

What a single candle can tell you

A few shapes carry enough meaning on their own to be worth knowing by name.

The doji. Open and close land at or near the same price. The period ended where it started. Neither side controlled it. Indecision, plainly drawn.

The hammer. A small body near the top of the range with a long lower wick. Sellers drove price down during the period and buyers took almost all of it back before the close. Same shape appearing after an advance instead of a decline has a different name, the hanging man, because the meaning flips with the context it shows up in.

The shooting star. The mirror image. Small body near the bottom, long upper wick. Buyers pushed price up and sellers reclaimed it by the close. After a decline rather than an advance, the same shape is called an inverted hammer.

Notice what just happened twice. The identical shape got two names depending on what came before it. Hold that thought.

Two and three candles together

Bullish engulfing. A down candle, then an up candle whose body completely covers the previous body. Buyers didn't just win the period, they erased the prior one.

Bearish engulfing. The same thing in reverse.

Morning star. Three candles. A long down candle, then a small-bodied candle that gaps lower, then a long up candle closing well into the body of the first. A possible bottom.

Evening star. Same structure, flipped. A possible top.

The part most people skip

None of these shapes mean anything by themselves.

A hammer in the middle of a trading range is noise. The same hammer at a support level that has held three times, after an extended decline, with volume confirming it, is a different animal entirely.

Location beats shape. Every time. A pattern is a piece of evidence about who won a contest, and evidence only means something in context: where the price is, what the trend has been doing, whether volume backs it up. Read candles against the level they occur at and the trend they occur in. Read them as standalone symbols with fixed meanings and you will lose money slowly while feeling informed.

This is the single biggest difference between people who use charts well and people who collect pattern names.

The other five chart types, briefly

Line charts plot closing prices as one continuous line. They strip out everything else, which makes them the cleanest way to see a multi-year trend or a support level that has held for a decade. They tell you nothing about what happened inside each period.

OHLC bar charts carry the same information as candlesticks, drawn as vertical bars with a tick left for the open and right for the close. Some traders find gaps easier to spot. Most find the balance of buying and selling harder to read at a glance.

HLC bars drop the open. Cleaner, less information, fine for daily or weekly work where the open doesn't matter to you.

Heikin-Ashi smooths price using an averaging formula. Trends get easier to see and hold, and choppy bars that would shake you out get filtered. The cost is real and worth stating plainly: the prices on a Heikin-Ashi chart are not the prices anything actually traded at. Use it knowing that.

Point and figure ignores time entirely. Columns of X's mark rising prices, columns of O's mark falling ones, and a new mark appears only when price moves by a set amount. Two settings define the chart: the box size, which is how far price must move to add a mark, and the reversal amount, conventionally three boxes, which is how far price must move the other way before a new column starts. Smaller settings catch more and produce more false signals. Larger ones filter noise and arrive late. It's the one chart type with a formal method for projecting price targets, which makes it unusual, though those projections are estimates and not promises.

Which one should you use

Candlesticks on a daily chart will serve most investors for most purposes. If you hold positions for months or years, add a weekly chart and a line chart for the long view. If you find yourself on a five-minute candlestick chart without a specific reason to be there, you have probably changed what you're doing without deciding to.

What to do with this

Pull up a daily candlestick chart of something you already own. Don't hunt for patterns. Instead, find the last three places where price stopped and turned around, and mark them. Those levels are where the evidence lives. Then look at what the candles did when price arrived at each one.

That exercise teaches more than memorizing forty pattern names, because it builds the habit that matters: level first, pattern second.