Stock Charts – Why do you need them?

Stock Charts – Why do you need them ?

So you decide you want to start investing or want to learn to trade. You watch some guy on TV touting(or yelling) a stock pick or you saw a magazine article with a fancy title like “Must Own Stock for 2010 ?”. The stock sounds like a great story and there is a reason to buy it because it has a “hot product that isn’t reflected yet in the stock price” or “its Price/Earnings ratio is cheap”…………STOP !!!!

Don’t just buy a stock based what I said above. Yes, some people will make money buying a stock because of something like cheap valuation but if you have no clue on how to read financial statements and understand the industry that the stock is in then you will probably lose money. Plus you can end up waiting a very long time for the stock market to recognize this “cheap” valuation.

Seriously, the stock market is one of the most frustrating ways to make money and there are endless studies and articles showing how wrong wallstreet analysts are or how the highest rated stocks will perform poorly.An easy way to lose money to listen to this mass market “noise”. Stop watching CNBC.

The best way to evalute a stock is by looking at a stock chart and understanding that the easiest way to make money in the stock market is to follow the path of least resistance.

Sure a stock might be cheap but buying a stock at $5 a share that was $20 a share 3-months ago means that you have A LOT of people who bought the stock at higher prices and will look to sell on any recovery.

It would be a lot easier to buy a stock that has stabilized and built a base for months or years and starts moving out of that base after all the sellers are worn out and gone. Always remember that stocks move on emotions not necessarily on valuation so a “cheap” stock can definitely keep going lower for a very long time if people are worried and decide to sell.

The basis of stock charts is that they will provide you with a emotion-free view of how a stock has performed and improve the odds on if it will move higher or lower. The best use of charts is to first find stocks that meet a certain criteria like growth rate or cheap valuation or increasing sales.

Then when you have a group of stock that meet your criteria, you can look at their charts to evaluate which has the best chance of moving higher.

Your whole goal with investing is find the best risk/reward for your money and understanding stock charts will improve that dramatically.

I will go over the various charting services in the next post but a great book that provides an excellent understanding of investing with charts (in laymens terms) is William Onei’s book How to Make money in stocks. Some libaries will have the book because its very popular but it is one you will probably re-read multiple times so I would just buy it.

There are thousands of other books about chart reading and technical analysis but the one above is an excellent one for understanding why charts are important and how to really understand why it is important to integrate charts with fundamental analysis.

Stay tuned for my next post on the diffferent chart services

– kinetic trader