Introduction to understanding Stock Charts

Over the past few weeks, I've seen some folks in our chat mention that they would like to learn more about the charting aspect of trading. In this forum we will go in depth about what different chart indicators mean, we will touch on different types of Candlesticks, and trading patterns and trends both bullish and bearish.
But to start it off, we need to get a basic understanding of how charts work and to show you that although they may look a bit intimidating at first glance, they are really quite simple if we remove all the scientific theories and long technical definitions and just take notice of HOW THE INDICATORS REACT WHEN THE STOCK PRICE MOVES.

Lets think of a stock as a vehicle and really, thats just what it is. Stocks are vehicles we use to GROW our money. Its a fairly safe assumption that everyone has a vehicle or is at least familiar with vehicles. In every vehicle I have ever been in, I have seen an instrument panel of some sort that shows important information about how the vehicle is operating. You have a gas gauge, Tachometer, Temp gauge, Battery gauge, check engine light, oil pressure gauge, etc, etc....

Stocks are no different, they also have insturment panels and they are called CHARTS. Think of each indicator on a chart as your gauges in your cars instrument panel. Now mind you, I am no auto machanic but I do know what to look for on the instrument panel to tell if my car is running properly or not. Likewise, you don't need to be an expert Technical analysysts to know if your stock is healthy or not, by looking at its chart. You simply need to be able to look at the indicators and tell if they are turning up, turning down, over bought, or oversold. You need to be able to recognize changes and that my friends is simple.

When looking at a stock chart it is important to look at all the indicators collectively and not base your buys and sells on one particular indicator. We want a clear OVERALL picture of whats going on with the stock. For example, If I'm looking to buy stock XYZ as a bottom play, I want to see the (MAJORITY) of the indicators turning up from oversold territory, (NOT JUST ONE INDICATOR). If I buy the stock just because the RSI 5 indicator is turning up, then I may have made a grevious error. RSI 5 is a fast acting indicator and can make quick moves up and down throughout any given trading day. So, it is much more wise to wait until several different indicators are turning up out of oversold territory. This provides us with some confirmation that the move is real and not just reflecting some insignificant intraday activity.

Some may be wondering what exactly is the RSI indicator. Well, really it don't matter. Like I said at the beginning, we will be providing information on what these indicators are and what they mean but our goal here is to keep this simple and to show you that you don't have to know all that to trade with charts successfully. Afterall, which one of you knows exactly what the correct operating temperature of your car should be on any given day? Most just make sure that its not overheating and all is good.

A few basic things we want to look for on our stocks chart is:
1) Confirmation by the majority of indicators as we mentioned above. Especially when BUYING a stock! When selling I tend to be more comfortable getting out on the first or second warning sign meaning (One or two indicators have reached overbought territory and have started turning down). This will sometimes keep you from getting the TOP price for your shares but will almost always keep you from getting stuck in a stock on a selloff.

2) BEFORE BUYING, we want to have a clear understanding of where our resistance levels and support levels are. We want to buy close to support as possible and we want to sell at resistance IF our indicators are reaching high levels or are starting to turn down, suggesting resistance will not be broken.
2A. Support can be identified as a previous low or one of our moving avg line such as MA 50 BELOW where the price is currently at. (example) Suppose stock XYZ is currently at .09 but over the last 6 months, the lowest it has been is .08 and it went there 3 different times over the past 6 months and bounced nicely from there all three times. Its safe to assume that .08 is some pretty good support. If we buy at .09 and the stock falls below .08 the next day, we sell imediately. Little loss is better than big loss. <-----Dang that sounded like confusious lol
2B. Resistance can be identified as a previous high or one of our moving avg lines OVERHEAD of where the price is currently at. (example) Suppose stock XYZ is currently at .09 but over the last 6 months it has been trading from .08 lows to highs of .22 repeatedly. Its safe to assume that .22 is a strong resistance point and we will be looking to exit around that area if we were to buy at .09. BUT WE WILL ALSO BE WATCHING OUR INDICATORS (Gauges) FOR ANYTHING ABNORMAL ON THE WAY UP. JUST IN CASE!

3) Take notice of TREND. Is the stock making higher highs on its peaks and higher lows on its dips or is the stock making lower highs on its peaks and lower lows on its dips. If its trending up (Higher highs and Higher lows) then your chances of breaking the resistance level of last run are better). But WE WILL STILL BE WATCHING OUR INDICATORS AS THE ULTIMATE DECISION MAKER. Likewise, if its trending down (Lower highs and Lower lows) then your chances of breaking resistance level of last run are worse). This is also important to notice when considering your entry on a stock. If its trending down, chances are it is going to go lower than our last support level.

These are just a few simple but EFFECTIVE things to get you started in reading charts. Don't be intimidated by all the lines and lack of understanding of the indicator definitions. THEY DON"T MATTER. What matters more is recognizing the change in direction of those indicators and how THAT affects the price movement of the stock. I would recommend that anyone learning charts take notice and jot down the symbols of some of the days biggest movers that you have seen posted on the boards. Pull a chart on those stocks and spend some time looking at how the indicators reacted before, during and after those big runs took place. Do this day after day and you will begin to see the big picture a lot more clearer. Remember, if you can drive a vehicle, you too can learn to read a stock chart in very short time. It takes some practice but its not rocket science. Trade well and good luck to you all.