How to Properly Utilize Chart Analysis
There’s an ongoing and probably never ending debate on whether or not using chart technical analysis is effective for trading stocks. My intention here isn’t partake in that debate, as honestly it doesn’t matter to me whether or not people want to doubt it’s legitimacy or it’s effectiveness. All I know is that I use it to my advantage and it works for me. Does it accurately predict every move a stock will make? Nope, but that’s not essential in order for it to be effective. What it does is help to swing the odds of a successful trade into my favor, so I’m no longer at the mercy of mere chance or luck.
Some of the keys to using charts is being able to spot certain chart patterns, which are the graphical representation of the battle between supply and demand. By learning what certain inefficiencies look like when they manifest themselves into patterns, you can use them to your advantage and trade them. There are certain setups that indicate a reversal of the price is starting or just around the corner, a breakout may be beginning, or a breakdown is taking place. There are countless patterns to study and watch for, and some are more effective than others.
So is it as simple as learning one or a handful of these chart patterns, then playing them whenever you see them? Is it really that easy? Well, if it was, everyone would be doing it and would be rich. This is the argument that people like to make against the effectiveness of charts, but my counterargument is, “Why should it be that easy?”. If you’re expecting things to be that straightforward and simple, then of course the results most likely won’t be there. After all, we’re talking about making or losing a lot of money, so why should it be easy? My opinion is that the key to long term and consistent success isn’t just in what patterns you use, but how and when you use chart analysis and play these patterns. For instance, if you’re playing a reversal pattern, but the stock you’re trading hasn’t declined very much to begin with, what is there really to reverse? However, if you spot a stock that’s down a significant amount already, then you know that there’s plenty of price action that could be reversed.
My main point is when you play a setup, make sure that you’re doing so at the right time and in the right way. There are never any guarantees in the stock market, but there are ideal times to play certain setups, where your chances of success are the greatest. No matter if it’s a reversal, breakout, or breakdown pattern, there’s a time to be looking for them and time to just sit on your hands and watch. If you cherry pick your trades and not just choose to trade any and every pattern you see, your overall results will improve greatly over time.