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Reading Stock Charts Makes You A Better Investor

|Includes: CTRX, Keurig Green Mountain Inc (GMCR), HMIN

 It’s funny when you see presentations by many so-called stock gurus. A lot of them seem to have the idea that people read stock charts as a hobby. Now, I have to admit, it really is fun to spot a bullish-looking pattern, buy the stock, and watch it run higher! And over time, I’ve been able to do that more and more. I can also spot patterns that look weak and bearish.

But I remember how tough it was at the beginning. All those bars and squiggles -- and people telling me I should be seeing an upper channel line, or a cup and handle or double bottom, or that darned ascending base!


But your goal isn’t to read charts.

Your goal is to make money in the stock market.

It’s been challenging in the last few years, to say the least. Even so, plenty of investors have made money by getting into the best stocks at just the right time. Here are just a few of the many that I was able to spot and ride higher.

Green Mountain Coffee Roasters -- up 259% in 14 months
Green Mountain Coffee Roasters GMCR stock chart
SXC Health Solutions -- up 250% in 16 months
SXC Health Solutions SXCI stock chart
Home Inns -- up 165% in 13 months
Home Inns HMIN stock chart


Those aren’t exactly household names. So how did some investors recognize these stocks early and make such big money?

They had an ability to spot something -- and that ability literally paid.

What was that ability? Knowing how to read stock charts.

But a lot of investors are scared about charts -- and I understand that. It’s often called “technical analysis,” and that makes matters even worse! It sounds like something you need two engineering degrees and a Ph.D. in finance to understand!

The truth is, anybody with a working brain can learn to read stock charts. And we already know your brain is working, because you’re interested in the stock market!

I was no math geek when I first began learning charts. I was an English major in college. I had written for the literary magazine, and appeared in theatrical productions. As an adult, I became a writer, and many of my early assignments focused on the entertainment industry.

When I first became interested in the stock market, about 20 years ago, the phrase “technical analysis” scared me.

But I couldn’t help noticing the success many of my friends were having in the market, and I realized they were doing it by identifying buy points on charts. I’d been a skeptic, but when I saw how much money they were making -- in stocks I’d never heard of! -- I became a believer.

So I began reading books. It was hit or miss. Most technical analysts were happier to show off how smart they were, and weren’t concerned about cluing in a newbie. Others seemed like they were trying to help, but they showed pages and pages of charts from 1962 and said I should study them. It was too much for a newcomer to learn.

(Later, I’ll review some of the books I read. Many have valuable points and pieces of advice that were quite helpful. But no single book had the right recipe to teach me stock chart reading.)

I also went to seminars, paying anywhere from a hundred dollars to several thousand. I really wanted to learn, but it wasn’t easy! Everybody was trying to sell me their system, and all of them assumed I wanted to spend every waking hour poring over stock charts. Hey, I have a busy life, and I just wanted to learn chart reading so I could make more money in the market, not as a hobby all by itself!

So I regrouped, and began to look at the times I had made money by spotting a winner on the charts. What had I done right? And where had I made mistakes, causing me to lost money?

I repeated this evaluation process with every stock I bought -- whether I made money or lost it. And after awhile, and with the help of many expert teachers I personally worked with, I was able to identify not just any chart patterns, but the ones most likely to result in big price gains.

It’s been more than a decade since that happened, and as I continue to coach investors at all levels, it’s more and more apparent that technical analysis is where people have the most trouble. And I understand that! Too many so-called “gurus” want to show you how smart they are, loading every indicator under the sun onto the charts, making them completely incomprehensible.

Or others are genuinely trying to be helpful, but they still confuse people with picture-perfect examples of charts from decades ago. What happens when a stock chart isn’t so perfect, and shows some ambiguity? That’s usually the case -- but the gurus like to show you the stocks that meet every definition of perfection. Real-life stock charts aren’t so perfect.

So the next post here will give you the best way to start out to learn chart reading skills. I know you ultimately want to become a better investor, not a better chart reader, so that’s what’s behind these lessons.

And we’ll start with the basics, and get you ramped up as fast as possible, so you can spot the companies that may be setting up for big price gains -- the next batch of winners like Green MountainSXC and Home Inns!

Disclosure: "No positions"