Chart Reading 101

The skill of chart reading can pay handsome dividends.

For over two decades, I have been trading the financial markets using a “techno-fundamental” approach. Initially, I leaned heavily on technical analysis, focusing on chart patterns. However, as time passed, I realized the crucial role of fundamental analysis—examining financial statements and company data—in refining my trading decisions.

This approach combines “technical” analysis to help me know “when” to buy and “fundamental” analysis to help me know “what” to buy.

And while I strongly encourage all new traders to learn and use both forms of analysis, developing simple chart reading skills alone can be remarkably beneficial.

Chart Reading = Technical Analysis

In essence, technical analysis tracks three important metrics: Price, volume, and time.

By analyzing these metrics, you can gain a solid grasp of the current price action of an asset.

Here’s a simple guide to interpreting price and volume on a stock chart.

Over the years, I’ve often been asked why the skill of chart reading is so powerful.

The answer is simple: Because the “smart” money always shows up on the chart.

“Smart” Money Shows Up on the Chart

So, who exactly constitutes this so-called “smart” money?

By “smart” money, I am referring to institutional investors – like hedge funds and mutual funds – who buy or sell stocks in very large quantities and typically base their transactions on sound, reasoned analysis.

These investors possess the resources and connections to thoroughly investigate a company and can determine with a high degree of confidence whether the company is on the right track in areas such as earnings, debt, and growth.

Institutional investors also have the ability to analyze economies on a large scale and make forecasts about the direction of interest rates, government regulations, currencies, and more.

Because institutional investors trade in such large quantities, their actions often show up on the charts, and therefore, when you use technical analysis, you are essentially able to analyze what the smart money is doing.

Not a bad strategy!

Of course, the introduction of dark pool liquidity has complicated life for the average trader by hiding some trading volume on private exchanges. But this has not entirely eliminated the value of basic chart reading skills.

Advice to New Traders

My advice to those who are eager to become better traders is to spend time learning to read charts. We have many resources – from webcast trainings to stock trading basics videos to member courses – that can aid in this endeavor.