The Art of Charts

Tuesday, June 06, 2006

The Art of Charts

The Art of Reading Those Charts

If you've been in the stock game for long, you've read a lot of charts. The charts are the basic way to understand price moves, and price moves, after all, are what its all about. But there's a lot more information on that chart, and in that little box that's usually underneath it. Earnings information, volume information, 52 week high and low, etc. are all there. There's a lot more there to, but those are the ones I think are most important. If you learn to read the important information that is in the charts you will be a lot better prepared to interpret price moves, and make those perfect trades.

The perfect trade, to me, is when you buy a bottom and sell a top. You can only do that if you are fairly confident that that bottom is the bottom or close to it. To me, volume numbers speak volumes. If it's down on a day of huge volume, that often indicates either a panic sell off, or a fundamental sell off. The trick is to tell the difference.

The first step between telling the difference is to look at the Earning per Share (EPS). If the EPS number is good compared to the price it will also show a good P/E. That's, of course the easy part. Then you have to find if the EPS is real or inflated by a big sell off of assets. Then you have to see if earnings have been fairly consistent, or have been just good one year, etc. Having checked into all of that, you have a basic idea of the real money making value of the company. This process starts on the charts and becomes deeper research only if the chart told you it was worth it.

The other major bit of important information on the chart is the volume. That's those vertical lines under the chart, some charts are better than others. I recommend picking one where you, personally, can understand the volume at a glance. Compare the day's volume to the average daily volume, and you get more important information.Then compare the price right now to the 52wk highs and lows, and you'll get more information. Once you have all the information you have to figure out what the stock is really worth, and how you think the price is likely to move. This is an art with a lot of scientific components. Two people can take the same data and come to totally opposite conclusions, and ultimately only the market will answer the question.

Being right more than you are wrong is the only thing that will make you money. But, only being wrong in that it didn't go up, and just sat still is always better than losing big on a pick. Those are two reasons to trade on fundamentals as much as possible. Nobody can definitively say without a doubt "this stock will go up", but a lot can say with reasonable accuracy this stock can't or shouldn't go much lower. That's often enough to keep from losing, and the winning has a bizarre logic of its own, and happens in its own way.

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Check out my personal trading and general life stuff journal here