Guest Author - Guido Deboeck

Reading stock charts can be is very confusing or made very easy.

Take technical analysis, it actually is a whole field of techniques with exotic names that may take years to absorb. Martin Pring’s Introduction to Technical Analysis is just one example (see related link). After you are done with study of price patterns, up and down trends, moving averages, oscillators of various kinds, momentum indicators, you may be ready for the advanced candlestick reading. Specialized books explain candle chart construction, reversal patterns, engulfing patterns, continuation patterns and many others. Some time ago I even found a book on Beyond Candlesticks (Steven Nelson, John Wiley 1994), as if what was invented by Japanese rice futures traders in the 1600’s, was not enough.

Besides technical analysis you can undertake a study of Elliot Waves ( Elliot Wave Principle by Frost and Prechter, 1985) or go into astrology and study the relationship between the movement of the planets and the changes in the stock market.

All is this is great for people who have nothing better to do, but what about you? You have a full time job or work at home, have children, a husband, have a household to manage; where do you find the time to learn to read stock charts?

The premise here is clearly that reading stock charts is an essential skill to become a good investor. But if reading stock charts requires years of study as technical analysis, candlestick and wave specialists like you to believe, then how do you acquire this skill? Should you take two or more years off to go back to college?

The truth is that reading stock charts can be made very easy but it is not in the best interests of all those who are writing books about these techniques, who are selling services for analytical charts, or who are organizing workshops on market chart reading, to tell you so.

To me the most important habit to learn is to learn to read stock charts upside down! By this I mean to first glance at the volume data at the bottom of the chart and from the volume data assess whether a stock is accumulating or distributing.

Take a weekly chart of any stock and count at the bottom the number of up volume versus down volume weeks going back 10 weeks. If the number of “up volume weeks” is greater than the number of “down volume weeks” (say 7 up versus 3 down) then the stock is accumulating; institutions are stocking up on it. If the reverse is the case (say 3 up versus 7 volume down weeks) then the stock is distributing; institutions are getting rid of the stock. You rather hold stocks that are accumulating.

Once you have determined this you look at the daily price movements. In them you can recognize up or down trends, or periods where the stock price is flat (moving within a narrow price range).

Investors Business Daily (IBD) to which you are already subscribing, provides a series of price patterns, called base patterns, that define exact buy points for stocks that are moving up. For example, cup-with-handle, cup-without-handle, saucer-with-handle, double bottom base, flat base, ascending base, high tight flag. All of these are also explained in William O'Neil's book (see related links). Once you learn to find these in stock charts you are all set. You do not need more, except learn to use a stock chart to determine when to sell.

Reduced to it simplest form, you sell a stock when you have a huge spike in down volume associated with a price movement that cuts through a 10 or 20 day moving average. And you never let a stock drop below 7-8% of its original cost.

Bottom line: learn to read a stock chart upside down, to associate volume with price movements, and to discover base patterns (like the ones mentioned daily in IBD). Always, I mean always, use only stock charts to determine when to sell and never violate the golden rules of selling. The rest of the technical analysis, wave theory, and/or astrological "mumbo jumbo" you can ignore.