The Role of Charts in Technical Analysis
Each day on TheStreet Pro subscribers see me break down the charts and indicators of individual stocks, ETFs, currencies, commodities and the like. However, I also like to provide more "educational" content that helps explain technical analysis from a higher view — and that forms the basis of my work here analyzing the markets and securities.
Today we will examine the role of charts in technical analysis.
There are many types of charts and graphs, from simple to complex. Let's check out some of the most common charts that you will find on web sites or from software packages.
Some charts are easy enough to maintain by hand (check out the articles by Helene Meisler) if you have a small list of stocks. Even in this age of computers, many traders maintain a chart or two by hand to get a "good feel for the market," or because the data are not available in an inexpensive and easy-to-access database.
A Chart Is Your Road Map
Over the years, traders have created many kinds of charts, driven by their desire to follow the market and influenced by their creativity and the tools at hand. Typically, the only limiting factors have been the availability of data and the number of hours in the day.
No matter what your level of experience, charts should always be the first working tool of the technical analyst and the trader or investor. Charts give you a quick and concise history of the price action, which is something you should know before you trade. The fundamental analyst could even use long-term charts to quickly show the periods of major price moves, to identify key price-determining factors.
Several approaches to charting have developed over the years and each method has its own features, benefits, and drawbacks. At the very least, think of the chart as a road map of where you have been.
In a fraction of a second, you can see the range of trading for the past year in a much more revealing way than looking at the figures in the newspaper that show the high and low for the last twelve months. At a glance, you can see if the trend is up, down, or neutral.
More Technical Analysis Education
- Overcoming the Pitfalls in Real-World Technical Analysis
- Moving Averages Don't Lie. Here's How to Use Them
- How to Use Price Momentum to Spot Turning Points
It may take a leap of faith to accept the chart as a tool that can forecast where you are going. However, you will gain that confidence and faith by reading about technical analysis and applying the techniques.
Just remember that a chart is only as good as its data and the experience you bring to reading it.
Employees of TheStreet are prohibited from trading individual securities.