How to read stocks? Essential key points for beginners to understand the market

Investing begins with the ability to read the market. Reading the market doesn’t mean staring at the screen all day, but quickly extracting key information from market data to judge the forces behind price movements. The market will never deceive you; it presents trends and turning points in the most straightforward way, and your task is to learn how to “understand” it.

Technical and Fundamental Analysis: The Two Pillars of Investment Decision-Making

Many beginners don’t know what to look at first. In fact, investment analysis can be divided into two aspects, just like evaluating a person by both their physical condition and their work ability.

Fundamentals Determine Long-Term Value

Fundamentals are about “whether the company is worth money.” You need to study the company’s operational capability, industry prospects, and financial health. The most direct tools are financial statements—income statements for profitability, balance sheets for financial strength, and cash flow statements for real cash flow.

For example, the income statement shows how the company earns money over a period: starting from revenue, subtracting costs to get gross profit, then deducting expenses to get operating profit, and finally arriving at net profit after tax. A good company should demonstrate a continuous profit growth trend, not a fleeting spike.

The balance sheet is like a financial snapshot of the company, showing how many assets it has, how much debt it owes, and the shareholders’ equity. Ratios like current ratio and debt ratio help you quickly assess whether the company is heavily indebted or financially stable.

The cash flow statement is most important—because profits can be manipulated, but cash flow cannot. Even if a company reports profits on paper, without real cash inflow, it won’t last long.

Technical Analysis Grasping Short-Term Rhythm

If fundamentals are for long-term perspective, technical analysis is for short-term timing. By studying historical price and volume trends, it predicts possible future price movements. It suits medium to short-term traders and investors wanting to seize entry points.

The core tool of technical analysis is the candlestick chart. Each candlestick contains four key prices within a specific period (e.g., one day): opening price, closing price, highest price, and lowest price. If the closing price is higher than the opening price, it’s a “red candlestick” (uptrend); if lower, it’s a “black candlestick” (downtrend). Continuous candlestick patterns reveal trends, volatility, and potential turning points.

Four Basic Elements of Market Reading

When opening any market analysis software, the first thing you see is a table. Mastering these basic pieces of information is the entry point to understanding the market.

Stock Code: The ID for Quick Identification

Each stock has a unique code. Taiwanese stocks usually have a 4-digit number plus “.TW”, like “2634.TW” for Hanshion; US stocks use 2 to 6 letters, like “TSM” for Taiwan Semiconductor. The code helps avoid confusion—“Netflix” and “Neflix” are the same company, but only one code.

Stock Price: The Center of Trading

The stock price is the latest transaction price, updated immediately after each trade. The opening price is determined by pre-market auction, and the closing price is the last transaction price at market close, often used as a reference for the next day’s movement.

Trading Volume: The Market Thermometer

Volume reflects the number of shares traded within a specific period (e.g., one day, one week), serving as a direct indicator of market activity. Higher volume indicates greater market attention, active buying and selling, and more potential for price swings.

Below the candlestick chart, volume is usually shown as a bar chart. Taller bars mean more active trading during that period. Combining volume with average transaction price allows calculation of trading amount; dividing volume by total shares outstanding yields the “turnover rate,” indicating liquidity activity. US stocks also emphasize volume, but since there are no daily price limits, volume often more accurately reflects market sentiment.

Price Change Percentage: Relative Movement Measure

Price change indicates the direction relative to the previous trading day’s close, with “+” for gains and “-” for declines. Expressed as a percentage, it’s the commonly seen “price change rate.”

Taiwan stocks have daily ±10% price change limits; hitting the upper limit is called “limit up,” the lower limit “limit down.” US stocks have no such limits, so theoretically, the price change can be unlimited. Also, don’t confuse colors—Taiwan and mainland China stocks use red for gains and green for declines; US and Hong Kong stocks are the opposite, red for down, green for up.

Taiwan Stock Market’s Unique Indicators: The Three Major Institutional Buyers and Sellers

Investors in Taiwan pay special attention to the movements of the “Three Major Institutional Investors,” whose buying and selling net positions are seen as market indicators.

Who Are the Three Major Institutions?

Foreign institutional investors are overseas organizations with the most capital, accounting for about 30-40% of trading volume, favoring long-term strategies. Investment trusts are local Taiwanese funds, often engaging in short- to medium-term trading to boost quarterly performance, with “window dressing” near quarter-end. Proprietary traders are securities firms’ own trading desks, divided into general proprietary trading (short-term trading for profit) and hedging desks (pure risk management).

Logic Behind Watching Institutional Movements

After market close each day, the Taiwan Stock Exchange releases the net buying/selling figures of these institutions. Continuous net buying by foreign investors often signals a bullish market; simultaneous selling by all three suggests caution for potential consolidation. However, institutions can also be wrong or trade against each other, so it’s best to combine this with fundamental and technical analysis to avoid false signals.

Reading Market Psychology with Candlestick Charts

Candlesticks are fundamental technical analysis tools. Each candlestick shows four prices: open, close, high, and low. If the close is higher than the open, it’s a red (up) candle; if lower, a black (down) candle.

The body of the candlestick indicates the basic price movement, while the “shadow” lines above and below show intra-period volatility. A long upper shadow suggests the price was pushed higher but pulled back; a long lower shadow indicates the price dipped but was bought back. Continuous candlestick patterns help quickly grasp trend directions and potential reversals.

Common Technical Indicators Quick Reference

Beginners don’t need to master all indicators at once, but understanding a few common ones can help you get started faster.

Moving Averages (MA) — The foundation for trend judgment. MA5, MA20, MA60 arranged in order indicate a “bullish alignment” (uptrend); the reverse suggests a “bearish alignment” (downtrend). Price above moving averages indicates support; below indicates resistance.

Relative Strength Index (RSI) — Measures overbought and oversold conditions. Values between 0-100, with >70 indicating overbought (possible correction), <30 oversold (possible rebound). Watch for divergence between RSI and price (e.g., price making new highs but RSI not), as a warning of potential reversal.

Stochastic Oscillator (KDJ) — Finds short-term turning points. Also ranges from 0-100, >80 overbought, <20 oversold. Golden cross and death cross signals are key buy/sell indicators.

MACD — Combines trend and momentum. Consists of DIF line, MACD line, and histogram. Pay attention to crossovers, histogram expansion/contraction (indicating momentum strength), and divergence with price.

Bollinger Bands — Measures volatility. Composed of middle band (moving average), upper band (resistance), and lower band (support). When the bands widen, volatility increases, possibly signaling trend initiation; narrowing suggests consolidation.

Practical Market Platforms and Websites

To do well, tools are essential. Choosing good market analysis platforms allows faster, more accurate information access.

Trading Apps — Legitimate trading platforms provide real-time quotes alongside trading services. These data are usually high quality, accurate, and timely. Many also offer free technical analysis tools, economic calendars, and other features.

Market Data Websites — Besides trading apps, some professional info sites are worth bookmarking:

• Yahoo Finance — Comprehensive market info
• Investing.com — Multi-market data
• TradingView — Powerful technical analysis tools
• San-Tu Stock Market — Taiwan stock info
• Chip Data K-line — Chip and institutional data analysis
• Financial Reports Dog — Financial statement data

From Beginner to Practical Trading

The essence of reading the market is extracting effective information from chaotic data to identify investment opportunities. After mastering basic concepts, the key is applying analysis to actual trading.

Start with basic stock codes, prices, and volume, then gradually move to candlestick charts, fundamental analysis, and technical indicators. This is a step-by-step process. Whether investing in Taiwan stocks or US stocks, long-term value investing or short-term technical trading, the fundamental logic of market reading remains the same— the market always reveals its true direction in the most authentic way, and you just need to learn how to observe and interpret.