[Max]

I see a lot of people reading charts who say that the stock is going up, so buy and if the stock is going down, sell. A lot of this is based purely on the stock price regardless of whether there has been a fundamental change in the financials.

Does past behaviour indicate the future with reasonable accuracy (enough to put money on your predictions)? It can't be as simple as saying all mood swings in the stock will eventually come back to the (insert period of time here) moving average. There must be something more to it than that.

What are the theories and psychological patterns you look for in the charts? How do you supplement your charting analysis? Bottom line: Why do you believe charts work?

 

[FrugalTrader]

I see a lot of people reading charts who say that the stock is going up, so buy and if the stock is going down, sell. A lot of this is based purely on the stock price regardless of whether there has been a fundamental change in the financials.

Does past behaviour indicate the future with reasonable accuracy (enough to put money on your predictions)? It can't be as simple as saying all mood swings in the stock will eventually come back to the (insert period of time here) moving average. There must be something more to it than that.

What are the theories and psychological patterns you look for in the charts? How do you supplement your charting analysis? Bottom line: Why do you believe charts work?

Charting is an art/science in and of itself and is no small task to truly master. The theory is, as you mentioned, that human thinking patterns/emotions repeat itself and can be read form a stock chart.

However, charting is NOT black and white. Even though there may be a chart signal to buy, it could very well trade against you (bad news etc). Most chart experts will agree that charting will help increase the odds of picking the right move, but not definitively.

If you're interested in learning more about chart reading/technical analysis, here's a great place to start:
http://stockcharts.com/school/doku.php?id=chart_school

 

[Rickson9]

My wife and I are poor chartists and technical analysts. We recognize our weakness and avoid it. We could both look at the same chart and interpret it to come to different conclusions. We are not intelligent enough to use charting and technical analysis to make significant money.

"I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer." - Warren Buffett

 

[ethos1]

I see a lot of people reading charts who say that the stock is going up, so buy and if the stock is going down, sell.

A lot of this is based purely on the stock price regardless of whether there has been a fundamental change in the financials.

Does past behaviour indicate the future with reasonable accuracy (enough to put money on your predictions)?

No

What are the theories and psychological patterns you look for in the charts

I used to try to learn as much as I could & to follow and predict, now I dont bother - ever

The only way to get the inside edge is to have an inside knowledge, this is what the charts wont tell you

Others look at & basically rely on volume, try to say that new business and increased revenues will do it - but that is all BS

How do you supplement your charting analysis? Bottom line: Why do you believe charts work

Current charting and any predictions for the next 24 -72 hours such as moving averages and the relative strength, IMO don't work ... then again what do I know.

Take today as an example on the financials on the NYSE & the pre-open on the banks (BAC & C as an example), they looked like it was going to be a blood bath until some idiot from the fed's said that the banks would be giving back some of the money they got... pop pop

No chart could predict that

Others try to predict by looking at the stock fundamentals, the volatility, the call/put ratio's, candlestick reading and company insider trading ... does any of that help ... your guess is as good as mine

 

[takingprofits]

Charts can help you identify points of resistance especially when used in conjunction with volume. That is where the past behaviour comes into play. Chart patterns can help in determining the likely direction a stock will move in the future.

When one uses candlestick charts, more information on the market behaviour becomes apparent which can be used to help refine entry and exit points.

When moving averages and oscillators are also used with patterns and candlestick charts, even more information becomes available to help in determining whether "now" is a good time, risk and reward ratio, and also to better refine entry and exit points.

It is worthwhile to spend some time at least learning the basics of charting as it can help increase your profits and limit your losses.

 

[Mike H.]

Charts can help you identify points of resistance especially when used in conjunction with volume. That is where the past behaviour comes into play. Chart patterns can help in determining the likely direction a stock will move in the future.

When one uses candlestick charts, more information on the market behaviour becomes apparent which can be used to help refine entry and exit points.

When moving averages and oscillators are also used with patterns and candlestick charts, even more information becomes available to help in determining whether "now" is a good time, risk and reward ratio, and also to better refine entry and exit points.

It is worthwhile to spend some time at least learning the basics of charting as it can help increase your profits and limit your losses.

I ain't buying it. If charting could be systematically used to increase profits and limit losses; a propeller-head would have written a computer program to do it automatically and quickly - and would have become a multi-billionaire before he arbitraged away his own advantage.

Late night television infomercials offer all kinds of seminars for 'systems' (stock scores, forex, optionetics, whatever) that will tell a person when to buy or sell to make huge profits. If these systems really worked, why don't the creators implement them for their own benefit and make billions, rather than lecturing to the gullible at the local Holiday Inn?

 

[takingprofits]

Nobody said it was magic.

Charts, indicators, and oscillators are tools. To use them is like building a house with power tools instead of hand tools. One still needs to know how to use the tools, how to build the house, and be working from a plan.

 

[Mockingbird]

Max,

Here's a trader's point of view.
> Technical analysis is a method to evaluate specific security by analyzing statistics generated by market activity, such as past prices and volume.(Investopedia)
> CHART just shows the overall picture of the specific instrument in a specific time period.
> By reading charts, you will see CHART PATTERNS. The chartist look for a recognizable movement within a specific timeframe. (Identifying specific human behavior and odds of that pattern repeating itself)
> INDICATORS help with the bias of that specific movement in that timeframe. (Is the movement sustainable or likely to reverse?)
> SYSTEM will combine all of above criteria into specific entries and targets, but most importantly, the risk management (STOPS).
> With proper risk management skills, the system will create positive EXPECTANCY. It is an average amount of money you expect to make on every dollar (or unit) you risk. No system will be perfect and will work all the time. The behavior of the market changes over time depends on volatility, market sentiment to name a few. Thus, you hear about people tweaking their systems accordingly.

As you can see, the chart reading is just one of tools in trading. The key to chart reading is not just comprehend them, but more importantly, being able to understand their limitations. This will help with your risk management skills - where lie true trading ability. Every great trader practices various aspects of trade/money/risk management skills. The chart patterns and indicators are just tools to help pull trigger for many traders, but ultimately it comes down to their risk management. Those who read well very much understand their limitations and adjust risks accordingly. The chart reading and trading are not the same thing. From my experience, those naysayers cannot distinguish between these two. There are no guarantees in trading. The unfortunate news might strike, your computer system or internet might go down, and even the exchange could shut down for days like in 2001. You can only minimize risks. The charts are only good as what you want to get out of them.

@Mike H: I saw W5 episode about ONE bad car dealership. Is that mean all the car sales people are cons?? The charts themselves don't make money. The chartists are just playing the odds.

@ethos1: The spike in the chart (due to news) is nothing to do with chart reading. No chartist try to predict the news. They are called speculators. If news is pending, then astute traders stay put. Have you seen why just before the pending news (eg. FOMC or any economic news break) there aren't many traders holding bid/offer at the exchange? If unforeseen news breaks while in a trade, astute trader will reevaluate their positions and mitigate their gain/loss accordingly. The chartist take advantage of the price action after the news and trade accordingly.

PS: Agree with FT - the chart reading is somewhat of an art and science itself.

 

[takingprofits]

Even if you thing technical analysis is bunk it is worth knowing and remembering just one element of analysis that will limit your losses and allow you to sleep at night with a higher net worth.

If the TSX (or your individual stock) falls below the 50 day moving average and stays there - sell. If you would have incorporated that into your investing you would have exited your positions around June 30 last year when the TSX was around 14,300.

If the TSX rises above the 50 day MA again and stays there - buy. You would have had a "buy" signal in January during the slide when the market peeked through the 50 day MA again - and if you would have bought then and sold when it dropped back through in mid February you would have experienced only a small loss - mostly your trading costs.

You would have eventually entered the market again in March around the 8500 market , avoided a 40% loss in your portfolio, and be enjoying this nice rally.

Remembering that technical analysts pay special attention to the 50 day moving average is a tool you can use that will allow you to take your profits rather than turning them into losses that take years to recoup.