To many new stock traders, learning how to read charts can be an exciting starting point into the maze of making money from day trading stocks. There certainly is no shortage of books and websites that will teach the many methods of reading charts.
Along with the methods there are a few styles of charts you can display: bar, candlestick, line, point and figure. The amount of information on charting can be overwhelming, if you pull up even the most basic charting package today you will see it has a minimum of 50-100 indicators available. For the new stock trader it will be an amazing journey into the process of learning how to use all the fancy tools.
Every year my partners and I attend the trade shows related to trading, in addition to hosting many workshops in our NYC office. It always amazes us how many people “speak” trading and charting fluently but have no idea how to make money.
They know all the buzzwords like Fibonacci and Elliot Wave, regression analysis and exponential this and that. The problem most of these potential traders have is they think that charts give the answers. Charts don’t give answers, they give ideas.
Charts are not crystal balls that if A+B+C happen then you will make money. The multitude of indicators that are available are all derivatives of price. Meaning they lag price. Do you really need something to tell you what price did if you are watching price already? How many watches do you need to tell what time it is?
I see far too many traders load up their trading screen with five indicators on the same chart. They get three indicators telling them one thing, the other two telling them something else and then they can’t make a decisive decision because they aren’t sure which signal is the one to focus on.
At its most basic level, charts display trader sentiment and commitments. Think about it, charts are formed from actual trades. Charts tell you where other traders took a stand and what they believe about future market direction. New highs and lows are formed from these opinions. When many traders have the same opinion, you get a trend. When there is consensus, you get a trading range.
The next time you look at a chart, keep it simple. Ask yourself the only two things you need to know to make a good decision:
- Are we trending or in a consolidation?
- Once you have clear answer to question #1, now ask yourself question #2: Is there an opportunity to make money in front of me based on the current price action.
In other words: Is there a good idea here? Has the uptrend paused and given me a spot to get in? If so how do I measure risk? Where did the buyers step up to the plate?
Is there a support I can buy or resistance I can short? If it breaks that area, can I manage my risk? When new traders mentor with us, we ask them to come up with good ideas. The better your ideas, the more money you will make.
Keep analysis simple. You don’t want to think when you are trading, or try to figure anything out. You simply want to trade. Say your ideas out loud and see if they make sense. Tell yourself the idea as if you were trying to raise capital for the trade.
I am buying a test of a previous low is a good idea. I am getting short “because it is too high” is not a good idea. Use charts to get good ideas based on current price action; do not use charts to predict. Don’t get caught up into thinking you need to get fancy to make money.
*DISCLOSURES: No relevant positions
