If You Know Nothing About A Stock Chart Know This
The majority of people that trade stocks, whether professionally or personally will rarely use stock charts to track the price action. Typically, the general public will buy or sell a stock because of a story/news they just heard about the company. For example, I recently talked to a married couple that bought Sirius XM Holdings Inc (NASDAQ:SIRI) in late 2004. The reason they bought the stock was because the popular disc jockey Howard Stern signed a long term deal with the company. So I asked them, how is that investment working out for you? They responded that it has been terrible for them, they have been holding the stock since December 2004 and the stock is nearly $5.00 lower than their purchase price. At the time they bought SIRI, it was trading around $8.00 a share, today SIRI trades around $3.85 a share. Clearly, these people were buying the story behind the stock, and this "story" placed them in a position which has been underwater for nearly 10 years.
Today, I'm going to show a pattern on a stock chart that will help you make money regardless of the story that you hear in the media, or anywhere else. One key note you must understand is, when the so-called "news" about a stock is reported in the media, the stock has already been aware of this information. You see, the stock market is very efficient, by the time the news hits the media, this information has already been baked into the stock price. So when the news is released to the general public, it is usually too late to jump on board. This is where the old market adage comes from, "buy the rumor and sell the news."
Beginner traders and investors, look for these two chart patterns and they will help to save you from the losing "news trade."
Scan stock charts and look for patterns that are basing or forming consolidation patterns before buying a stock. Charts with these patterns have helped me make money on a consistent basis many years ago, and they still work just as well today. Basically, the way to identify this pattern is to look for a stock that is off of its lows on a chart, then it starts to trade sideways for a long period of time (note the chart below). If you are looking at a daily chart then you would want to see sideways consolidation for a couple of weeks, or even months before expecting the stock to move higher. Remember, if you want to build a house you need to first have a solid foundation before you put up the walls, the same goes for trading stocks. All solid breakouts in a stock happen after a solid basing pattern forms on a chart.
The legendary trader Jesse Livermore said, “all through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.” The bottom line, learn to read a chart. If you know nothing about reading a stock chart, at least understand the consolidation pattern and advance your skills from there. But most importantly, you must understand that what you hear in the news or other media outlets is almost always baked into the cake (aka stock price already). If you want to profit for the long term and not fall into the traps which make almost all amateur and fundamental traders lose money, learn to read the charts now.