Let me show you what I mean. Stock pundits love these kinds of graphs. Even more important, many stock pundits believe that you can use this history to predict where the stock is going to go. That predictive process is known as technical analysis , and people have debated for years over whether it actually works. Technical analysis basically says that you can look at patterns in the past behavior of a stock — combined with basic tenets of human behavior — and predict where the stock is going.

This will usually hold true for some period of time until an exceptional piece of information comes along pushing the stock over the resistance or under the support, at which point new lines form. It had a hard time bursting through that line from the IPO in August to roughly April , when Google kept pumping out unbelievable growth numbers. At that point, it broke through that resistance line and hit another resistance line line B until roughly November , at which continued amazing numbers caused that line to give way.

The new level of resistance seems to be line C — around Seems simple and reasonable, right? And you can obviously see how people could make money from this. If the price was floating around A, for example, as it was in early , if you had put in a buy order to buy at about , you would have made money when it crossed that level of resistance.

Similarly, if you put in a buy order for when it crosses line B at about , you would have again made money. That D line with a Google stock value of about or so makes sense as a level of resistance up through October , at which it bursts through.

Stock Charts and Stock Market Graphs for Stock Trading Explained For You

If you had set up a buy order — telling your broker to buy Google if it crosses — you would have been very happy up until about February, when Google peaked at somewhere over But then everything goes to disaster. It quickly drops back below that supposed level of resistance, stays roughly there for a while, then begins to drop even more in July, finishing this chart just below So, why did that happen?

Obviously, the late drop was due to the ongoing economic crisis of , but that itself shows a problem with technical analysis: Also, past performance is never a guarantee of future results.

Take, for example, the recent debacle with Apple. A false rumor about Steve Jobs having a heart attack caused the stock price to drop to a 17 month low a 5. Imagine, if you will, if Jobs actually had passed away.

You can see patterns in there, but identifying the meaning of those patterns and what they portend to the future is much more of an art than a science.

Learn How to Read Stock Charts Including Price & Volume Activity

So, how can I read a stock chart in five seconds? First, look at the general trend over the last six months or so. This is usually a clue as to the general health of the company — no major news, just little signs of good health or poor health.

Stock Market Prices Do Not Follow Random Walks

Second, look for recent spikes. A big spike upwards or downwards means something significant has happened to the company. These are usually game changers and are definitely worth noting.

Third, see if they throw up charts for similar companies. See if the general pattern of the stock in question matches the general patterns of the competitors. What these three things point you towards are signs that something has changed in the company — something that might violate the reasons you own the stock.

You trust the CEO. They deliver a stellar product. Their product has some sort of inherent advantage over the competition. Each of those changes, which you can quickly pull out of a chart, is simply a sign that you need to investigate the stock you hold in more detail to make sure the reason you have for owning the stock is still intact. Just look for the important events, the ones that would change your opinion of the company or how it does business.

Leave the rest to the people who do this eighty hours a week. Or, better yet, do what I do: Save money and expand your travel budget by packing any one of these cards on your trip.

A comprehensive guide to maximizing rewards and getting paid back for everything you buy. Hi Trent, I strongly agree with your opinions for the most part. It is a certainty that the average person should shy away from technical analysis as a means of selecting stocks. However, you left out one vital piece of the puzzle in your charts. Most technical analysts make decisions based on the relationship between price AND volume.

Your charts show only half of the story price. If the stock price shoots up on smaller than average volume read: Of course the opposite is also true. Selling on higher than average volume indicates less demand and thus a sharp drop in the stock price. Of course this subject demands a lengthier explanantion, but the major points have been made.

Trent, this is a great for getting a quick overview. You provide us with some simple and effective tools. If a stock looks compelling, people can do their own intense research. I am really looking forward to your reviews of Benjamin Graham and your perspective on his premise of value investing.

Maybe you would be good at Political Science! I had to look at graphs like that all the time in getting my polisci degree and found it completely mind-numbing.

Technical analysis is the astrology of stock trading: I show just the price.. I did use technical indicators and they work mighty fine. Better to introduce one concept and make it comprehensible for many than introduce two or three at once and have it lose people. I never knew about looking at financial charts this way. It makes so much sense. And I think most technicians would agree it is as much art as science.

More like a meteorologist trying to predict the weather 20 days ahead. That was very easy to follow and understand, even for an investing dummy like myself. For instance, I would see the support line B to actually be sloping upwards from about October to about July Then, when it broke through that support at about Janurary , that meant real problems for the stock.

To my knowledge Warren Buffet does not invest in index funds although he does suggest that the average Joe invest in them.

Charts mean absolutely nothing except history. Trent, you quite often write about passive investments but rarely if ever on active investments. Active investments can bring in 50 to times more return on your money. I think that this obsession with passive income is one of the reasons this society has gotten itself into trouble.

Everyone is looking for a free ride or at least an easy ride. TA only works when enough people believe it and even then it is more voodoo than science.

I like that you mentioned technical analysis without bashing it but without claiming it will reveal certain truths about a stock.

It is what it is: I think it was Warren Buffet who said that he realized TA did not work when he flipped a chart upside down and still showed the same results. Another solid post, Trent, and I particularly agree with your closing: Then I would set simple stop loss sell order when stocks reach certain price level. I would keep moving this stop loss few percent behind price, setting for example on last minimum. This is a good sign to close your position. I agree with the way you are explaining how to understand stocks but one particulary indicator I read is the Beta.

If you go to google finance and type in a stock you will see a spot that says Beta. Beta is telling you how risky a stock is. The same is true if it goes the other way.

I hope this helps. With the benefits of hindsight you could always tell where to buy and where to sell. But then the question is when do you cover your short?

Wwwwwwwwwooooooooooooowwwwwwwwwww this stuff is confusing!!!! Aaaaaaaaaaaaaaaaaaahhhhhhhhhhh I swear my hair is falling out! Uh, I thought it was all the idiots who made the overly aggressive and uninformed decisions who caused all the problems. I think passive income generation, and the patience it requires, is actually the solution to many of our societal problems right now.

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Stocks Basics: How to Read A Stock Table/Quote

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