Have you ever noticed that a lot of investment advisors like to show youstock charts. They use charts to show you if a stock is likely to up or down, whether it should be bought or sold.
But they don’t always do a good job of explaining how to read the charts. So even though the information may be helpful, it’s not doing you any good, because it’s cloaked behind a bunch of incomprehensible lines and jargon. Ascending base? Upper channel line? Three weeks’ tight? Support at the 10-week line? What does all this mean? And how should all these bars and squiggles be interpreted?
I’m going to speak personally: There’s no question that knowing how to read charts has made all the difference in my success as an investor. Without chart reading, I honestly can’t imagine how I would have spotted my big winners, like Apple (AAPL), Green Mountain Coffee Roasters (GMCR), Salesforce.com (CRM) or Baidu (BIDU), as they were poised to break out and make huge price moves.
Fundamentals alone just won’t get you there. In my experience — and the experience of many, many others — stock charts are the only thing that will do the trick.
A chart will show you, instantly, if a stock is being bought in heavy volume, a sign that institutional investors, like mutual funds and hedge funds, are grabbing up shares. Also, it will show you if it’s being sold heavily after a big run-up, a signal that the pros are bailing out.
And yes, the classic patterns most certainly are indicators that a stock is digesting earlier gains, and may be preparing for another run. I’ve made so much money from stocks coming out of sound patterns, that I don’t even bother with those who scoff. In fact, I kind of feel sorry for them.
But I absolutely remember how I felt in the beginning, before I knew how to read charts. People around me were seeing cups and handles, double bottoms, flat bases, three weeks’ tight.
I didn’t see any of it. I just saw a bunch of price bars on a chart. If someone showed me a breakout, I couldn’t tell how it differed from anything else on the chart. I was sure they were making stuff up, like when a little kid gazes up at the clouds, and insists she sees animal shapes!
But I knew people were making money. I knew they were buying stocks that went up — and isn’t that why we’re all investors? So I decided to stick with it. When I read a chart analysis in an investing newspaper or on a Web site, I made sure I understood everything about it. I began to actually see those coffee cups with handles, and could identify a stock that might be ready to run higher. It was pretty exciting — and I became convinced that not only did it work, but it was completely learnable, without sacrificing every precious hour of free time!
So in this series of posts, I’ll show you the process I used, step by step, to master chart reading, or technical analysis.
By the time you’re done reading this series, you will have the tools you need to identify the basic chart elements and spot chart patterns that can signal a run-up may be near.
Of course, stock chart reading is a skill that you can continue fine tuning, even after you learn the basics. But without knowing how to interpret a chart and understand some of the most simple patterns, you can’t go on to higher-level skills.
In the next post, I’ll tell you how I came to the point of believing that stock chart analysis was they key to better investing results — and how I was right! I’ll share that process with you.