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Stock charts

Trading and charting

As technology has improved and financial markets have become increasingly computerised, the use of stockcharts has become essential for any trader. There is an entire industry of chattering chartists willing to expound their in-depth analytical insights,  there are many websites and software providers offering a wide variety of charting tools, including this site (ADVFN which provides a comprehensive free charting service). 

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Technical Analysis

The advanced use and study of charts is called technical analysis. It is a grand title for something which at best can be described as a pseudo-science.  Trading and charting is more about fractal behaviour and probabilities than empirical scientific truth. Stock charts are tools to help you to simplify and visualise complex decisions. Using a chart is more analogous to playing a musical instrument, some people are better at playing than others, and timing is everything. Technical analysis (TA) can be as important and useful as it can be beguiling and destructive. A professional futures and options trader once described stock charting to me as "the act of plotting human behaviour", its ups and downs the reflections of various shades of fear and greed. "The reading of a chart," he said "is more of an art than a science", because ultimately the way you read and react to a chart reflect your levels of fear and greed.

A simple chart with some moving averages

simple stock chart
A basic stockchart

Don't lose the plot

A stock price essentially only exists in two dimensions, up and down, but plotted over time it becomes a panorama of mountains and valleys. Retrospectively the chart appears to be on a definable path, which lends to interpretation and story telling. A story where you begin to believe you can plausibly guess the ending. As a price has only 2 directions, if you make a prediction which isn't too far left of field, it stands a reasonable chance of coming true (if you wait long enough).

Charting is very important for any trader, but judge their value by the realised profit you have made, not the convincing analysis that lost you money!

The true value of charting is not its predictions, but rather in how you manage your risk and trading behaviour as a result of using the chart.