Becoming a Better Trader: Let the Chart Speak

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Yesterday we discussed just how important it was to first realize in which direction the trend was moving in order to keep the wind at our backs and increase our potential for profit. Today, we’re going to drill down a bit to individual stocks and discuss just how important it is to let the chart be your ultimate guide.

When I think of a stock chart, I'm reminded of the old spaghetti sauce commercial where a woman stirring a big pot was being asked over and over about certain ingredients. “Basil?” “It’s in there.” “Oregano?” “It’s in there.” And so on. Stock charts are very similar to that pot of sauce: They're nothing more than a collaboration of all public information, and debatably, all private information as well. “Insider selling? It’s in there. Insider buying? It’s in there. Earnings growth? It’s in there.” And so on.

While I do review news to understand what's going on, and I also study fundamentals, I rarely will let these things alter my decision-making, choosing to stick solely with the chart as my final guide. Typically, after someone joins me on Tickerville.com and starts to trade alongside me, at some point I'll face some good questions that always go back to the spaghetti-sauce commercial: “Quint, what do you think of the recent insider selling? Quint, what do you think of last quarters earnings? Quint, what do you think about management?” I always instruct the individual that I'm rarely (if ever) concerned with these things and will always choose to stay focused on the chart. Why? You got it - because, “it’s in there.”

While a chart is nothing more than historical price and volume plotted between 2 axis lines, if viewed properly it's the window into how people really feel about the company and its prospects for the future. Furthermore, because of human nature and the greed factor, many will debate that it also holds the secrets to the future, as charts so often mysteriously give hints when something big is coming.

People are often baffled when a stock goes on a big run only days before a major announcement, or starts to fall on no news only a few days before a terrible quarter is announced. However if you want to interpret what's happening to create this, the bottom line is, the chart was telling you something was coming.

Regardless of what you may believe about their ability to foreshadow the future, charts are by far the best representation of what truly has been happening in the past. So often we are inundated through the media with very smart individuals telling us some of their best ideas. On any given day, we can watch an hour of television and probably come away with a dozen stocks that sound like they're ready to sky rocket. How does one navigate through this noise to really find the winners? It’s really quite simple. Look at a few charts.