How to Learn Stock Chart Analysis

OMG! Am I supposed to read THAT?!

Internet stock trading has become easy enough for anyone to do at home in their spare time. You can start trading stocks online today by just signing up with one of many online brokerages like E*Trade, ScotTrade, Fidelity - any online stock broker. That's what I did with Fidelity. I started online trading right away... and lost all of my money within 2 years! Looking back now, I would have done a lot better had I known how to read stock chart patterns before I started. Let me show you now what I learned about 'Technical Analysis', and how this can help you before you make the same mistake I did.

Instructions

1. 

   TRENDLINES -- or, remember Newton's First Law of Physics? '...an object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force.' Stock prices tend to follow short- and long-term trends. Look at the image of the chart next to this step. Which direction do you think the 'trend' is? Right, it looks like it's going up. If you can draw a line connecting three or more of the tips of the chart bars together, that can show the trend direction. Try it (yes, physically draw on paper!) on some charts you can find online for free, like at StockCharts.com. Remember, you have to be able to connect 3 or more bar tips!

2. 

   CHANNELS -- If you draw a trendline on the top tips and bottom tips of chart bars and they form more-or-less parallel lines, this is called a channel. Stock prices tend to stay within channels, for a period of time. See the channel in the picture? If you extend those lines to the right, you may be able to predict what range the stock price may stay within for the immediate future. There are other neat things you can do with channels. Many times, if the stock price crosses over an upper or lower line, it may just be 'breaking out' of that channel and heading further in that direction! Draw some channels on your charts and see if that's what eventually happened.

3. 

   SUPPORT AND RESISTANCE -- I have expanded the previous chart to the left, to show a longer-term view. Again, drawing horizontal lines that connect 3 or more bar tips, I have drawn a red support line and a green resistance line. 'Support' means that stock buyers tend to buy when it gets to that price (supporting any more downward movement) and 'resistance' means that stock sellers tend to sell when it gets to that price (resisting any more upward movement, see?). See how the price 'tested' the resistance line a couple times, crossed it a couple times unsuccessfully, and then finally broke up through it? This happens ALL THE TIME. Draw some support and resistance lines on some charts and see for yourself!

4. 

   MEGAPHONE -- Many times, the upper and lower channel lines you draw will not be parallel. When the lines are broadening, that's called a 'megaphone' pattern. This suggests growing disagreement among the buyers and sellers as to what is a good price. Generally, if this happens after an uptrend, the likely next move is downward. Find some charts with this pattern and see what happened.

5. 

   TRIANGLES -- Again, if the upper and lower trendlines are not parallel, and are narrowing, this is called a 'triangle' pattern. Obviously, the price will not continue narrowing indefinitely until it hits the apex of the triangle and then stop moving. We can sometimes predict what will happen when this pattern occurs. 'Ascending triangles', where the upper line is horizontal, signal a possible move up through the upper line. 'Descending triangles', where the lower line is horizontal, signal a possible move down. And a 'symmetrical triangle', where neither line is horizontal, well... this one could go either way!

Tips & Warnings

• If there is interest, I would be glad to share more of the information I have learned about stock chart analysis over the past several years in trading stocks, options and futures. Just write and let me know what you'd like to know. :-)

• I am not a stock market broker or official authority on stock trading. This is just from my own experience.

• Please trade wisely.

• Do not put any money at risk that you cannot afford to lose.

• Of course, past performance is no guarantee of future results. ;-)

Resources

• A great starter book for reading stock charts.
• My Own Trading Web Site