Posts tagged Charting

I find the stories about the California Gold Rush era fascinating because at few other times across the course of human history, could a person of modest means potentially achieve great wealth. Though the quest for gold was not always easy for the 49ers, and not all of them achieved wealth, once they literally “staked their claims,” each person had the same opportunity to achieve instant riches as the next. The Gold Rush was the great equalizer.

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Finding great stock trading opportunities is, in a way, like the 49ers’ quest for gold, in that anybody— whether young or old, rich or of modest means, male or female— has a chance to create wealth for him or herself. But finding a shinny nugget at the bottom of your pan is one thing, while finding those select stocks that have the most explosive upside potential is quite another.

Today, I know why trading a stock just as it breaks out can lead to explosive gains, and I know the thrill of watching a quality stock quickly swell my portfolio, but this was not always the case. In fact, I tried out just about every other stock trading strategy first, because I found studying stock charts tedious and confusing. Which stocks should I concentrate on? What should a stock’s chart look like? What moving averages should I use? Which oscillators are the best?

You would think that as an executive at a financial television channel, I’d have the inside track on slick ways to trade the market, wouldn’t you? After all, I regularly rubbed elbows with some of the most influential stock market gurus on the financial seminar circuit. There was only one thing. Each individual was busy selling his or her own unique stock trading strategy. As I bounced from trying one trading strategy to the next, I began to realize that many of these techniques did not work as predictably as I had expected.

At one point, I even turned to penny stocks thinking they were the way to make big money in the market. After all, 5,000 shares of a stock made you feel like a pretty big investor. But in the end, even a $1. 50 stock could become a . 75 stock overnight, on some little ripple in the company’s game plan, and poof! Half your grubstake…gone! And, since penny stocks are usually so thinly traded, it took a “month of Sundays” just to execute a sell order. Meanwhile you watched as your sell order single-handedly brought the stock’s value down far below what you were hoping to get for it.

The shortcomings of many of the stock trading strategies I tried only made me more determined to find a more predictable way to make money in the stock market. My epiphany came while turning the first few pages of a book on stock charts that had been sent to our television station by the publisher. The book had been sitting on a bookshelf in a corner of my office for some time collecting dust. The book? Analyzing Bar Charts For Profit by John Magee.

Magee was talking about how the field of technical analysis developed, beginning with the early moving averages developed by Charles Dow dating all the way back in 1884. As I read, three things occurred to me:

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1. First, some very smart people had been hot on the trail of finding a system of using charts to anticipate stocks’ movements for a very long time.

2. Second, charts represented the only visual, factual record of a stock’s movement that was not filtered through some financial news analyst or stock market guru.

3. Third, and most important, it actually seemed plausible to make reasonable assumptions, based upon certain charts, as to when a stock was nearing its greatest potential. Could I have finally found the “holy grail” to stock profits I had been searching for?

Of course, nothing is ever as simple as it seems at the outset, and quite frankly, the study of charts took me far deeper into technical analysis than I ever had intended to go. Yet somehow the quest for a more definitive way of knowing when to buy high-potential stocks had grabbed hold of me, and wouldn’t let go until I had some hard and fast answers.

I read every book on charting techniques I could lay my hands on. At night, armed with my charting software, I’d download a list of stocks and stare at their charts trying to discern what they were telling me. William O’Neil’s “How To Make Money In Stocks” helped me to better understand the relationship between a stock’s daily price action and its volume. Slowly, after what seemed an eternity, I began to spot the chart patterns.

Of course gaining knowledge about technical analysis is one thing, and putting this knowledge into practice is quite another. Here again, there was no shortcut. No abbreviated course. No quick cure. I had to rigorously trade stocks based upon my assumptions about a stock’s chart. I’d hear seasoned traders say this is a process that takes about four years of frustration, elation and often, disillusionment. They weren’t kidding. Once I emerged from this “birth of fire,” I had a newfound respect for the market forces. Gone was any pretense of cockiness or self-pride. I felt almost as if I had achieved a kind of “warrior status. ”

In the end, I learned that trading stocks just as they broke out was simply the most dependable way to make money I had ever been exposed to. There wasn’t any guarantee, there were still surprises, and not everything worked out exactly as planned, but when a stock’s time had come to break out, there just was no quicker way to make money.

These days, I usually begin my search for stock market gold by scrutinizing a company’s fundamentals and choosing the best of the best. Why? Because a leading company has an established track record for executing a successful game plan, and is less likely to surprise you with negative news. Believe me, with all the varying factors that you have to contend with in trading stocks, you at least want to have your best players on the field. Why would you want anything less than your top quarterback in the Superbowl? The same thing applies to stocks. Does the company have successive quarters of earnings increases? How does the company stack up to others in terms of its “relative strength,” or price stability? Is the company in a strong industry group? Is the stock under accumulation by mutual fund companies?

Then I look at the stock’s chart. Here’s where things start to get exciting, because breakout stocks form certain time-tested patterns just before breaking out. “Time-tested” does not mean foolproof, but from a cup-with-handle, double-bottom, flat base, or other types of chart patterns, you can begin to discern the telltale signs of pent up demand. The stock may drift sideways, or slightly downward as if it is disinterested in going any higher. Meanwhile, it’s daily volume drops to a whisper. It’s almost as if the stock is sleepwalking. A lot of traders take this to mean there is no interest in the stock. Nothing could be further from the truth.

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