There are two things I was never taught, but rather had to learn myself: One is reading putts. The other? Reading charts!
Now, that's not to say I didn't
someone to teach me how to read putts. In fact, as I look back over my golf career, if I had ever managed to be anything better than "acceptable" with the flat stick, I might have really been able to do something with my game. Instead, my usual round consisted of me hitting 17 greens in regulation ... and going one over par!
But all that wasn't nearly as costly as the price I had to pay to learn how to read charts. No, that cost me
money. In fact, if your children ever apply to Traders University, be sure to visit the many fine buildings I've endowed on campus!
So, I started thinking the other day, that maybe one thing I could leave with you is the knowledge of how to read charts yourself. Really, it's not hard, especially if you break it down into six steps.
Now, are these steps hard? Sophisticated? Complex? Hey, c'mon, this is GBS you're talking about! Remember? The
guy! (or was that Paul Stanley?) Anyway, call me Mr. Simple.
Therefore, if you can't follow this outline, then don't try to read charts! Go do something easy, like deciphering corporate S-1s!
Anyway, let's look at the first three steps today, and then a few charts. Then I'll finish up with the last three steps and some more charts on Wednesday.
Step No. 1:
Identify the current trend. Now, "current" depends on what your time horizon is. For a daytrader, it might be the trend since the open. For a trader like me, I like to look at the past few weeks or months. For a long-term investor, current might be the past few years.
But, for the examples below, I'll use "current" as I look at it: the past few weeks or months.
However, once you know what your time horizon is, that doesn't mean the current trend will be readily apparent. In fact, for a lot of charts, there's so much noise and confusion, you have no idea what's going on. If that's the case, then you must do something that is hard for many traders: Move onto the next chart! That's right; a lot of charts will be as clear as mud! Thankfully, though, there are a lot of charts that
clear. Use Step No. 1 to filter out the bad ones and get to the clear ones.
Step No. 2:
Identify any chart "highlights." Now by highlights, all I mean is anything unusual about the chart. You know, anything that jumps out, and makes you say, "Wow!" It's like some of those silly golf courses that put a bunker right in the middle of a green. So, when you're lining up your putt, it's kind of obvious and everything, but you want to pick a line that keeps your ball from going through the sand!
Now, what are some chart highlights? Well, stuff like double bottoms, huge "V" bottoms, big gaps down. The kind of stuff that, even if you didn't know the names, you'd know
was going on!
Step No. 3:
Identify support, resistance and/or relevant trend lines. Of course, for many of you, this is a real stumper, but it shouldn't be. All I look for is multiple points on a chart that can be touched by a single line. The mistake most people make is to get too enamored with not only drawing the exact perfect line, but trying to draw the exact perfect line the very first time!
Well, if you go that route, drawing support, trendlines, etc.,
hard. But, it shouldn't be. Instead, what I do is draw multiple lines, until I come up with a single line that best represents what I think is going on. And even that line might be wrong! But I don't care. I'm simply using that line as reference point. Heck, I'm still three steps away from making a trade.
Okay, now let's take these three steps and look at a few charts.
Easy, right? If it's straightforward, you chart it and potentially trade it (assuming it makes it through steps four through six.) And if it's not easy to read? Then you move onto the next one!
Intrigued? Enticed? Bored out of your skull? Hey, I serve all parties and will continue to do so this Wednesday with the last three steps!
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide Investment advice or recommendations, he welcomes your feedback at