This article was contributed by “Traph.” a very experienced contributor from“Topstocks.

Topstocks are offering a “Free Pro” account for one month at no obligation to you whatsoever. You can get there by clicking on the link provided on the right hand side of this page.You’ll be sorry that you missed out!He also runs one of the best online sources for Stock Analysis.:- www.21stcenturypl.com

Evening to you all,

Have seen recent posts regarding charts and their uses and found that some still don’t acknowledge that charts are indeed useful.

I find it somewhat incredible that some traders or investors are unlikely to view a chart and be able to interpret it’s representation of trends and history.

We should all know by now that charting is a historical depiction of a company’s traded shares and should always be seen as such. It is not an interpretation of a future and should not be likened to reading a crystal ball either.

You will also note that it is historical, in that it reflects on what has actually occured in the company’s timeline. A timeline so important that it can not be ignored.

What do we get out of a chart:

1. Price history.

2. Trend direction.

3. Volatility in movement.

4. Volume traded.

The above are the 4 basic elements that make up a chart. From those elements we can deduce the following:

1. Price trend direction. (vertical movement)

2. Time frame (horizontal movement)

Having the above knowledge we can now begin to understand what we are dealing with and from that we can also be aware of our entry and exit points before commencing a trade.

It is wise to know these things before any trade execution because if we enter blindly we may enter too high a price and if we are exiting a trade we may be exiting too low a price as well.

So why should we use the chart?

Simply put, the history of the price movement is always relevant to certain events in the company’s history.

Events that may be local or global political events, commodity pricing such as we have recently experienced with Uranium spot price and Gold, New discoveries and acquisitions and any piece of news that may effect the industry the company is involved in.

I can assure you, if you open any company’s chart you will find that on certain highs and lows and within a maximum 1 week time frame some type of news or announcement effected the movement of that stock.

That’s where the chart becomes a valuable tool, in that we guage future movement of the share price by noting previous effects on the price relevant to it’s news or announcement, however we also need to note an important factor in that it’s the time frame or the lag of in which this occurs.

Not all stocks shoot north on announcements, sometimes it takes a few days to a week for this to be reflected and it is noted in the traders actions following such announcements.

Now combining the basic chart and some relatively easy to use indicators (and there are hundreds) we then have a powerful tool to use as a guide to historical data. We then may be able to interpret such data visually in order to guage a trend or maybe find a marker on the chart before engaging in any financial decision of entry or exit.

The most basic of indicators is the MA (Moving Average). Using this indicator in different time frames within can show a short to long term price oscillation which happens to be non volatile and linear.

I find the combination of the 5, 10, 20 and 50 Day Moving Average to be an excellent indicator to use. Combining this with the price line we find we now have 5 lines on the chart depicting an average price over different time frames including the current time frame we refer to as the daily price line.

If we take a monthly chart and use the daily divisions and we note the daily price line is traveling below any of the other 4 MA lines, it would indicate the price has in the past been trending lower than average!

On the other hand if the daily price line is traveling above the other 4 MA lines, it is seen as being bullish in the past and above average!

Why is that so important?

If you were to expand that chart to say 3 months, you will note a distinctive marker between the 4 MAs and the price line, it’s called a cross over/under, and you will also note that when the price line crosses the MA lines the price is either trending higher or trending lower, depending on where from it crosses!!!

If the price line crosses from below the MA lines, it’s known to be bullish and trending upwards, if it crosses from above headed lower it is known to be bearish and the price consequently falls. These are very useful markers in the chart that should not be discarded.

Using this basic technical analysis on a chart will allow many to make a better and more informative decision before parting with their money.

This is as basic as it gets, you may then expand and use MACD, RSI and all sorts of other indicators. There is quite an extensive online resource at www.incrediblecharts.com that many newbies will find useful.

But by all means, don’t discard a chart as being a crystal ball, because it’s not! using it correctly is a very powerful tool to understand where your investment is likely to be heading and best of all where was it for you to make that decision to buy or sell




	
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