How to Read Stock Charts Like a Pro and Improve Your Selection and Timing

In the world of medicine, X-rays, MRIs, and brain scans are “pictures” that doctors study to help them diagnose what’s going on in the human body. EKGs and ultrasound waves are recorded on paper or shown on TV-like monitors to illustrate what’s happening to the human heart.

Similarly, maps are plotted and set to scale to help people understand exactly where they are and how to get to where they want to go. And seismic data are traced on charts to help geologists study which structures or patterns seem most likely to contain oil.

In almost every field, there are tools available to help people evaluate current conditions correctly and receive accurate information. The same is true in investing. Economic indicators are plotted on graphs to assist in their interpretation. A stock’s price and volume history are recorded on charts to help investors determine whether the stock is strong, healthy, and under accumulation or whether it’s weak and behaving abnormally.

Would you allow a doctor to open you up and perform heart surgery if he had not utilized the critical necessary tools? Of course not. That would be just plain irresponsible. However, many investors do exactly that when they buy and sell stocks without first consulting stock charts. Just as doctors would be irresponsible not to use X-rays, CAT scans, and EKGs on their patients, investors are just plain foolish if they don’t learn to interpret the price and volume patterns found on stock charts. If nothing else, charts can tell you when a stock is not acting right and should be sold.

Individual investors can lose a lot of money if they don’t know how to recognize when a stock tops and starts into a significant correction or if they have been depending on someone else who also doesn’t know this.

Chart Reading Basics

Charts record the factual price performance of thousands of stocks. Price changes are the result of daily supply and demand in the largest auction

marketplace in the world. Investors who train themselves to decode price movements on charts properly have an enormous advantage over those who either refuse to learn, just don’t know any better, or are a bit lazy.

Would you fly in a plane without instruments or take a long cross-country trip in your car without a road map? Charts are your investment road map.

Chart patterns, or “bases,” are simply areas of price correction and consolidation after an earlier price advance. Most of them (80% to 90%) are created and formed as a result of corrections in the general market. The skill you need to learn in order to analyze these bases is how to diagnose whether the price and volume movements are normal or abnormal. Do they signal strength or weakness?

Major advances occur off strong, recognizable price patterns (discussed later in this chapter). Failures can always be traced to bases that are faulty or too obvious to the typical investor.

Fortunes are made every year by those who take the time to learn to interpret charts properly. Professionals who don’t make use of charts are confessing their ignorance of highly valuable measurement and timing mechanisms. To further emphasize this point: I have seen many high-level investment professionals ultimately lose their jobs as a result of weak performance.

When this happens, their poor records are often a direct result of not knowing very much about market action and chart reading. Universities that teach finance or investment courses and dismiss charts as irrelevant or unimportant are demonstrating their complete lack of knowledge and understanding of how the market really works and how the best professionals operate.

As an individual investor, you too need to study and benefit from stock charts. It’s not enough to buy a stock simply because it has good fundamental characteristics, like strong earnings and sales. In fact, no Investor’s Business Daily® reader should ever buy a stock based solely on IBD’s proprietary SmartSelect® Ratings. A stock’s chart must always be checked to determine whether the stock is in a proper position to buy, or whether it is the stock of a sound, leading company but is too far extended in price above a solid basing area and thus should temporarily be avoided.

As the number of investors in the market has increased over recent years, simple price and volume charts have become more readily available. Chart books and online chart services can help you follow hundreds and even thousands of stocks in a highly organized, time-saving way. Some are more advanced than others, offering both fundamental and technical data in addition to price and volume movement. Subscribe to one of the better chart services, and you’ll have at your fingertips valuable information that is not easily available elsewhere.

History Repeats Itself: Learn to Use Historical Precedents

As mentioned in the introduction, and as shown on the annotated charts of history’s best winners in this post, our system for selecting winning stocks is based on how the market actually operates, not on my or anyone else’s personal opinions or academic theories. We analyzed the greatest winning stocks of the past and discovered they all had seven common characteristics, which can be summarized in the two easy-to-remember words CAN SLIM. We also discovered there were a number of successful price patterns and consolidation structures that repeated themselves over and over again. In the stock market, history repeats itself. This is because human nature doesn’t change. Neither does the law of supply and demand. Price patterns of the great stocks of the past can clearly serve as models for your future selections. There are several price patterns you’ll want to look for when you’re analyzing a stock for purchase. I’ll also go over some signals to watch out for that indicate that a price pattern may be faulty and unsound.

Types of Stock Chart Partterns:

• The Most Common Cup And Handle Stock Chart Patterns in Detail with Several Pattern To Analyze
• Saucer With Handle Stock Chart Pattern And Example
• Double Bottom Pattern and Double Bottom Chart in Stock Trading And Real Examples For Double Bottom Pattern
• Flat Base Stock Pattern And Real Examples
• Square Box Chart Pattern And Real Examples
• High Tight Flag Chart Pattern And Real Examples
• Base on Top of a Base Chart Pattern And Real Examples
• Ascending Bases Stock Chart Pattern And Real Examples
• Wide-and-Loose Chart Pattern And Real Examples