Keys to Using Charts for Safe Profitable Investing

Charts are a popular way to make stock trading decisions, but which charts you use and how you configure them is critical to matching your goals and objectives. The catch to using charts is that you can become overwhelmed.

Charts are available in a variety of ways:

  • Online free chart programs
  • Charting software
  • Online broker sites with charts
  • Chart based investment software
  • Investment programs that include charts

The challenge with charts is the individual chart settings. Most online sources, even brokerages have default settings. But who benefits with these default settings? The key to using charts, regardless of the source, is to configure them to meet your needs.

The real objective in using charts is to tell you when to sell, hold a position, or buy a new ETF (stock or fund). Sounds simple enough, but do these signals meet with you objectives for growth, the frequency you are willing to trade or look at your portfolio, your level of risk tolerance?

For example, let’s look at a Moving Average chart. This chart typically shows two lines, a fast (F) average meaning the average price calculated over a short time frame, and a slow (S) average meaning the average price calculated over a longer time frame. In addition is the actual total return price line of the particular stock or fund.

Conventional evaluation of a moving average chart is that if the price line cuts down through both the fast and slow lines that is a sell signal. Conversely when it cuts up through both lines it is a buy signal and when it is in the middle it is either a ‘watch’ signal if you are considering buying this or a ‘hold’ signal if you already own the stock.

But what settings do you use for the fast and the slow periods?

How often are you willing to trade?

Here are some ideas:

  • Daily or weekly – F10, S30
  • Weekly or Monthly – F20, S60
  • Monthly or Rarely – F50, S150

While daily/weekly trading may result in substantially more trades than monthly or rarely, the potential for major losses is also diminished.

Another example, the Full Stochastic chart can also be used to give buy-hold-sell signals. This chart typically shows two lines, an average price line calculated from two types of moving averages (K + D) and a trigger line (T). When the average price line crosses the trigger signals are generated.

Generally the Full stochastic chart is interpreted:

–when the price line cuts up through the trigger line and is in the bottom 20% area of the chart it is a buy signal; when the price line cuts down through the trigger line and is in the top 20% area of the chart it is a sell signal. When the price line is between the bottom 20% and the top 20% it is in ‘watch’ territory and you should watch it for a few days before taking any action, if at all.

Again; How often are you willing to trade?

Here are some ideas:

  • Daily or weekly – K14,D3,T3
  • Weekly or Monthly – K35,D15,T10
  • Monthly or Rarely – K150,D50,T40

The other Key Question about charts is “Exactly what charts to look at?” Some chart software has over a hundred different charts and if you talk with 10 people who like charts you will rarely find that ten look at the exact same charts.

The other aspect of looking at charts is simply how much time do you have? If you have a portfolio with eight (8) ETFs or funds and are going to look at 20 charts for each one plus possible new ‘buys’ you are going to need a lot of time. You could end up look at more than 300 charts and at just 15 seconds each you would be well over an hour… and possibly dizzy.

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