By Al Thomas
Let me answer. Because it will help make money.
When buying or selling stocks, ETFs, mutual funds, bonds or commodities it is wise to look at a chart. Even those who are fundamental analysts look at charts to get a historical picture of the item in which they are interested.
When you go to the doctor many times he will do an electro-cardiogram (EKG). It prints out a chart of the heartbeat. From this chart the doc has a better idea what is the condition of the body. The same principle applies to a chart of the price action of an equity.
As the trader/analyst looks are various charts he will see patterns that repeat. Over time certain price patterns usually forecast what will happen next. Does it show accumulation or distribution? Is the trend bullish or bearish. An experienced chart reader can be right 80% of the time. The action taken will determine profit or loss. Many times it will say ‘do nothing’.
The action taken is not part of the chart. That is where the experience of the trader/investor truly determines profit or loss. One of the basic rules of trading anything is to minimize a losing position and let a profitable one run with a trailing open stop loss order. Risk management is the secret to long term profits.
Every investor should learn basic chart patterns. Don’t buy one of those expensive educational programs. There are web sites that will show various chart formations and interpret them. The problem with the “schools” is they want the student to learn everything. You can’t. It is my advice to learn 2 or 3 chart patterns and learn their actions very well.
Then choose about 10 equities – stocks, ETFs or commodities – and follow these daily waiting for the chart pattern you have studied to appear. Don’t put money on it for at least 6 months. Keep a notebook of where you think you would have bought along with your stop loss order.
Once you put money on it you will find there is a big difference in paper trading and when you have your money at risk. Emotion many times overcomes logic. It is not the chart that is wrong; it is you. It is will take considerable time to learn to be a profitable trader whether you are long term or short term.
One of the interesting things about chart patterns is it doesn’t make any difference about the time period. A monthly, daily, hourly, 15-minute, 5-minute chart will all make the same patterns. Intra-day traders and long term traders create the same patterns. The chart is an EKG of the mind set of traders brain patterns.
Learn to recognize them and have an advantage over those who do not.
Al's new ebook (32 pages) is available on Amazon for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learned one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. The title is Never Lose Money In The Stock Market Again. Copyright Williamsburg Investment Co 2013