Getting Started in Stock Chart Reading

By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Market Letter, 1/13/10

I've found that most investors make a few mistakes early on as they start reading charts; mistakes that can be easily avoided.

The first mistake is that some investors try to become jacks of all trades ... and end up being masters of none. What I mean is that novices will focus on way too many indicators and time frames. First they look at the RSI Index and the Slow Stochastic. Then they add on the MACD. Then add on five different moving averages (including exponential and simple moving averages). Then they add on Bollinger Bands. Yikes!

This is just way too much information, most of which will be too short-term and too contradictory. You should approach reading charts like you should approach learning to golf—you don't go out and hit every club two or three times. No, you focus on a couple of irons (or maybe your driver) and try to develop some consistency with them. Then you work on some other clubs.  In other words, it's a step-by-step process.

With charts, I can tell you that, to this day, I only have four things I look at regularly—price, volume, two moving averages (25-day and 50-day simple) and relative performance lines (how a stock is doing compared to the market). That's it. Now, I'm not saying my way is THE right way to look at charts, but I just want to show that it's usually better to have less on your chart. So keep it simple, especially in the beginning.

Another mistake to avoid is that you should never assume that charts are going to do something they can't—predict the future with certainty. Realize the chart is simply a current look at a stock (or sector's or market's) current supply and demand situation, not a crystal ball. Yes, examining charts can help put the odds in your favor, but there are no sure things in the market, and a chart's picture can change quickly.

In total, chart reading is a skill you need to learn if you're going to be a successful growth stock investor over the long haul, and keeping things simple, and realizing what charts can do (put the odds in your favor) and can't do (predict to the day what will happen) will help you get off to a good start in your education.

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