Whenever you turn Bloomberg or CNBC, you usually get blown away with the amount of raw data they throw at you. Stock charts with lines coming and going, pluses and minuses, peaks and valleys. For the average investor, there simply is no way to separate what is useful data from what is not. Therefore, investors often rely on the experts to tell them what the useful data is. Many would prefer not to do that.
These commentary specialists, if you have ever followed politics, rarely are telling the whole truth and are often not all that well informed. Trying to understand the basics of stock charts and their data you can learn one truth: most of what you need to know, you can figure out rather quickly.
Very often, CNBC, Bloomberg, Fox Business and those other business related television shows and stock analysis magazines and websites are always showing complex graphs pointing out the ups and downs of a particular stock price or stock index.
Stock so called “experts” love these kinds of graphs. Regardless of what size flat-screen Television you have, they look really cool since there is a lot of data compressed in them. More importantly, many stock experts believe that you can use this stock chart history to predict where the stock is going to go. That predictive process is better known as technical analysis. Investors have debated for years over whether or not it actually works. Technical analysis says that you can look at the stock chart’s patterns in the past behavior of a stock, combine it with human behavior, and be able to predict where the stock is going.
If you are really interested, the Wikipedia article on technical analysis is worth reading.
Stock Support and Resistance Levels
According to stock technicians, over short time periods, a stock normally has a support and resistance level. A “support level” is the price that a stock tends to not drop below. A “resistance level” is the price that a stock tends to not be able to break past. This will normally hold true for a period of time until an unique piece of information comes out. That information will be the driving force pushing the stock over the resistance or under the support level, at which point new lines are formed.
Seems pretty simple, right? It is easy to see from this approach to reading stock charts how investors make money from this. If you can identify a resistance level on a stock chart that you want to invest in, simply just place a long-standing order to buy that stock if it crosses that level. You are likely buying it at a new resistance level meaning you are likely going to profit.
It makes sense if you look at reading a stock chart in a clear-cut example like that. Technical analysis approach to reading a stock chart is not a guaranteed method to predicting the future of a stock. Major events often cause such analysis to go snafu. Also, past performance never guarantees future results. Just because an investor is able to identify some pattern in the historical data of a stock does not mean any of it is going to hold value in future trading sessions.
Take, for example, the recent debacle with Apple. Before the loss of Steve Jobs, a false rumor about him having had a heart attack caused the stock price of Apple to drop to a 17 month low (a 5.4% drop). Imagine if Jobs had actually passed away then. It’s an event that no technical analysis could have predicted since technical analysis only deals with long-term patterns in very stable companies.
In short, technical analysis is great for a stock “expert” to use while he/she shows off but, in many ways, it is much more similar to reading tarot cards or tea leaves. Sure when reading a stock chart, from a technical analysis point of view, you can see patterns in them. However, identifying the meaning of those patterns and what they signify to the future of the stock is much more of an art than a science.
Profiling Technical Analysis
It is pretty clear why “experts” like profiling technical analysis on stock charts. Investors tend to wonder: “what can you possibly get out of such charts in the five seconds they are up on the screen? Assuming you are following the basic fundamentals of owning stocks in companies you either know and believe in or have a specific reason for owning that has nothing to do with the stock price which is really the best way to invest.
Start by looking at the general trend over the last three months and six months. This is normally a good clue as to the general health of the company. No major news, very few signs of good health or even poor health. If you are reading a stock chart of a stock you own or might be interested in buying, you might want to take note of a steady rise or a steady fall and find out why it happened.
Next, look for recent spikes. A huge spike upwards or downwards means something very significant has happened to the company. These spikes you will see on a stock chart are usually game changers and are definitely worth noting.
Finally, see if you can throw up charts for similar companies to check similarities. See if the pattern of the stock you are checking on matches the patterns of their competitors. If so, then it is most likely a sector effect or a broad market effect and not as troublesome as something radically different than a competitor, which you should still look into.
These three actions taken when learning how to read a stock chart collectively point you towards signs that something has maybe changed in the company that might go against the reasons you would own the stock. You should only own a stock if you have a specific reason for doing so. Either you trust the CEO, they deliver a stellar product or their product has some sort of inherent advantage over the competition. Whatever the reason for owning a stock, each of those changes, is simply a sign that you need to examine the stock in more detail to solidify the reason you have for owning or buying the stock is still unbroken.
Stock Chart Volume
One final bit of data to consider is Volume. Volume shows that there is an interest in the stock since for every buyer, there must be a seller. This is the supreme scenario but it is not absolutely required. Many investors tend to favor low volume pullbacks over high volume pullbacks. If a stock is pulling back on low volume, it means that traders have lost interest in the stock and things get really quiet. This is usually when institutional traders come in: when everyone has forgotten about the stock.
Whether you are investing professionally or doing it as a serious and focused sideline for income, there is not much else you can really get out of a glance at a stock chart. Don’t let yourself get overloaded with useless amounts of raw data. Trading stocks does take some work. It will, however, get faster over time. After you have looked at hundreds and hundreds of charts in this manner, reading a stock chart will become second nature. Instead of it taking minutes to analyze a stock chart, it will take mere seconds. Simply look for the important events, those that would change your opinion of the company or how it conducts business and leave the rest to the people who do this 27 hours a day, 9 days a week.
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