How to Read Basic Price Charts — Three Reasons Why You’ll Want to Own This Skill

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The ability to evaluate basic price charts of stocks, ETFs, or other financial market assets is one of the most valuable skills a trader or investor can own.

Here are three great reasons you’ll want to know how to read basic price charts:

  1. You’ll know when to enter the market at the best—not the worst–time
  1. You’ll know how to purchase stocks and ETFs rising in strong, orderly uptrends
  1. You’ll know how to use a simple chart indicator, a moving average, as a risk management tool that makes you—and saves you—money.

Reason 1. You’ll know when to enter the market at the best—not the worst—time.

The economies of industrialized nations—and so their capital markets—are cyclical.  They move in a series of “booms and busts.”  Investors who can read basic price charts can glance at a chart of the S&P 500 and quickly discern which environment the market is experiencing.

Price charts help them invest in the good times and keep their profits safe during the challenging times.

Let’s talk about Fred.  Fred is 55 years old and he’s set aside $300,000 for his retirement, but he’s a low-risk guy and has always kept his savings in CDs.

In September of 2008, however, he admitted to a few of his friends that he wished he had saved more.  They urged him to put some of his money in the stock market.  They even kidded him about being “late to the stock market party.”

On his friends’ advice, Fred opened an online account and bought shares in several equities recommended by his friends and his online broker.  Within the next six months, Fred’s account fell by 30%.  Now his stocks would have to earn 60%, just to get back to break-even.

If Fred had known how to read a simple weekly or monthly line chart, he would have recognized that when he was about to enter the market, the U.S. benchmark known as the S&P 500 was rolling into a downtrend—meaning price was moving through time in a pattern of lower highs and lower lows.  Simply put, it was not a good time to enter the market.

Below, a monthly line chart of the S&P 500 Index shows the benchmark rolling into a downtrend in 2008 (just as Fred decides to invest).

   S&P 500 Index – Monthly Chart

Chart Courtesy of MetaStock

Even though the stocks Fred bought were stable companies, he didn’t know that in a downtrending bear market, four out of five stocks will follow the S&P 500 lower.  Armed with that knowledge and a simple line chart, he might have held off investing his hard-earned money until the bear market slowed and turned bullish.

 Reason 2. Purchase stocks and ETFs rising in strong, orderly uptrends

To me, buying shares in an equity or ETF without looking at a price chart is akin to getting into my car and backing out of my driveway without looking in the rear-view mirror.

When you target a stock to purchase, and then check out its price chart, you will see the stock’s price history over time.  This “picture” and tells you whether its price moves up in an orderly fashion (desirable as an investment), or if tends to hop up and down in irregular moves like a kangaroo on speed (not desirable as an investment).

KLA-Tencor Corp. (KLAC) – Weekly Chart

Chart Courtesy of MetaStock

As you see by the weekly chart above, KLA-Tencor Corp. (KLAC), a semiconductor company, has moved in a fairly orderly uptrend (uptrend: price moves in a series of higher lows and higher highs) since the beginning of 2016.  Even before that time, when the stock stumbled lower in the year prior, it does so in an orderly fashion.

Some price patterns, like KLAC’s– are generally orderly and easy to read.  Orderly patterns help you make wise choices when it comes to buying, managing risk, and taking profits.

Other price patterns are disorderly—and keep their investors reaching for the Maalox bottle.  For example, check out the daily chart of Cabot Oil & Gas Corp. (COG) below.

Special Offers to Weiss Educational Readers

Do you know how to glance at a price chart and understand what it is saying?

When you know how to evaluate price charts accurately, you make smarter decisions and earn bigger profits.

If you’d like to discover the right way to read charts, quickly and easily, then check out Toni Turner’s popular recorded webinar, “How to Read Charts.”

And for this week only, she is offering this already-low-priced training to Weiss Education customers only for a 25% discount.

To find out more, click here  and enter this code at checkout:  WEISSHRC

Please don’t miss out.  All signals in the market point to a volatile summer.

If you know how to evaluate price charts, you’ll know how to trade and invest stress-free and keep your profits safe!

 

Cabot Oil & Gas Corp. (COG) – Daily Chart

Chart Courtesy of MetaStock

Investors who invested in COG endured a wild and woolly roller-coaster ride for the eight months you see here, and profits were surely small, if any.

If I looked at this price chart before I entered, I would have rejected the stock.  (Had I not glanced at COG’s price chart before entering, however, I would have experienced a gut-wrenching ride.)

Reason 3. You can use a simple moving average as a risk management tool that makes you—and saves you—money.

If you know how to evaluate a simple price chart, you will probably want to plot one or two moving averages on it.  I discussed moving averages in this recent article.

The 50-day moving average is a great all-around indicator that traders and investors many times use as an entry and exit signal.  That means when price moves above (and stays above) the 50-day line, we buy.

Assuming our stock or ETF’s price travels in an uptrend, we take profits when the stock closes below the 50-day average.  Note the daily chart of Pepsico Inc. (PEP), below.

Chart Courtesy of MetaStock

If you had used this basic daily price chart, you could have entered PEP when price rose above the 50-day moving average—and here’s the trick—that 50-day line had started to rise (green arrow).

At this point, you would have entered at ~ $104. If you held PEP as it trended higher above its 50-day line, until the current day on this chart, (June 15, PEP trading at $117), you would have earned a 12% profit, so far. (PEP has not closed below the 50-day moving average, so the position is still intact.)

The three reasons we just discussed are a short list of the benefits you can experience from owning the ability to read basic price charts.  There are many more. . .  being able to evaluate charts means you will trade and invest with less stress and more confidence.  And here’s the best part—you will increase your profits.

For more information on learning how to read charts, check out the message below.

Until the next time, keep green on your screen!

Toni Turner

Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.

She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT.