If I had only one thing to look at to determine the future direction of a stock’s price, I would want a chart that had only the daily closing prices over a period of time. That’s really not much to go on but if I held the chart out at arm’s length or farther, I could quickly grasp whether the stock was going up, down, or sideways. And I could trade on that information.
My success rate may not be outstanding but I could generally tell what the stock had been doing. If it was going up I would want to buy and if it was going down I would want to sell. This would be a rather crude trading strategy but it would still be better than having no strategy at all. Fortunately I have never had to trade under these types of conditions.
Beyond price, everything else found on a stock’s chart can only confirm or refute my interpretation of the direction of the stock’s price. The easiest to see and interpret would be a moving average indicator. Simply interpreted, if the stock was above the moving average I would consider buying the stock and if below I would consider selling the stock. Not a great Improvement but it is a giant leap over using only the stock’s price.
Multiple moving averages would be even better. Darryl Guppy, an Australian Investor and financial market educator, has written several books and operates the website guppytraders.com in which he discusses his method of investing using Multiple Moving Averages in order to make buy and sell decisions.
Beyond these I’d bring in Bollinger Bands, the MACD, the RSI (Relative Strength Index), Full Stochastics, and the ADX (Advance Decline Index). Occasionally I will look at others but by the time I look at these I’ve identified whether or not these momentum indicators and oscillators are telling the same story. If they all agree, I act. If they don’t, I move on to another candidate.
Once I’ve acted that’s when the real work starts. I then have to monitor that stock to ensure that the price continues to move in the direction that the chart was telling me and that the momentum indicators and oscillators continue to confirm. When they don’t, then the stock may be getting ready to reverse. If I’m in I may want to get out. If I’m out, I may want to get back in.
The one thing I have to be conscious of constantly is that the market will not go where I want it to go. It will go where the universe of investors push it. If I buy a stock and it goes against me, I have to exit immediately. I have to admit that my decision was wrong and I need to cut my losses before they get bigger.
When an investor starts to think that he’s right and the market is wrong, it’s the beginning of the end for that investor. The market is neither right nor wrong. It’s simply the market. It’s just people making decisions and then acting on those decisions. And a good investor is one who learns how to look at the charts and understand what they are trying to tell him. And then take what the market is willing to give.