analyze a share market chart

8/6/2019 Analyze a share market chart

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You have to be able to analyze a chart and come to a

conclusion about whether or not to risk your hard

earned money on a trade.

That is really the bottom line.

And this is what separates the novice trader from the professional. There are

several factors on a chart that make it worthy of trading. By analyzing these

factors, we can determine with high probability which direction a stock will

move.

There several questions that you want to ask yourself when you look at a

stock chart. Here they are...

What stage is this stock in?

Is this stock in and uptrend or a downtrend?

Is the stock at the beginning, middle, or end of the trend?

How strong is the trend?

Where are the trend lines?

What wave is this stock in?

What do the moving averages tell me?

Was there a breakout recently?

Is the chart "smooth" or "sloppy"?

Are there any chart patterns?

Are there wide range candles in the direction of the trend?

Are there any gaps in the direction of the trend?

Are professionals selling strength or buying weakness?

Where are the support and resistance areas?

Is this stock at a Fibonacci level?

What does volume tell me?

I know it seems like a lot of information to try and keep track of but all of the

above questions are essential to chart reading mastery! Now, copy and print

out that list of questions and keep it handy next to your computer. Make

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several copies so that you can check off and make notes as you analyze your

next chart.

Go ahead, I'll wait...

Got it printed out? Great! Now you won't forget anything important when it'stime to analyze a chart for your next trade. In the heat of battle, when

emotions are running high, it is very easy to forget to look for some of the

most basic things on a chart. I've done it. That is, until I made this list!

Ok, now let's go through the list one by one to make sure that you know how

to answer the questions correctly. Don't worry, with practice, you will not

even need to think about these things. It will become automatic.

You will be able to read charts with lightning fast speed. In just a couple of

seconds you will be able to glance at a chart and know all the answers to the

questions above.

Stages, Trends, and Waves

Let's look at an example chart...

Nice chart! This stock broke out through a consolidation in July and now it is

in a nice strong trend. The arrow is the day on which we see this stock. So,

what questions can we answer just from glancing at this chart?

This stock is in stage two.

You remember the stages right? Stage one is a consolidation, stage two is an

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uptrend, stage three is another consolidation, and stage four is a downtrend.

This stock was in a stage one in July but at the end of July, it broke out into a

stage two. It is currently still in a stage two.

This stock is in an uptrend.

This is the easy part. If a stock is heading toward the upper right corner of achart then it is in an uptrend! For some reason, this tends to elude some

traders!

This stock is near the middle or end of the trend.

How do we know that? The breakout signals the start of the trend. There has

already been one significant pullback. Had we bought stock on the first

pullback, then we would have concluded that we are at the beginning of the

trend. But since this is the second pullback, then we know that this trend

may not last much longer.

This stock is in a strong trend.

The ADX indicator (not shown) is near 30 which we consider to be a fairly

strong trend. The higher the ADX, the stronger the trend. This stock is at the

lower trend line. You can see by the thick green line that this stock has hit

the lower trend line. You can draw the trend lines in manually, but after you

have been trading for awhile, you will not need to draw them. You will be

able to see them automatically.

This stock is in the fourth wave.

In Elliott Wave theory, a stock goes through 5 waves in an uptrend. In thechart above, the first wave after the breakout is wave 1. The first pullback is

wave two, the next wave up to $17.33 is wave three, and the pullback that

we are in now is wave four. There is one more wave to go!

Conclusion

Now we have identified that the possible future direction of this stock is up.

Nothing is ever certain in the stock market! However, by looking at this chart

we can be certain that the probabilities are on our side for a continued move

to the upside.

After you finish reading this tutorial, run your scans and go through some

charts. Try to identify the various factors mentioned above. Just

understanding the nature of stocks and the different stages, trends and

waves that all stocks go through will greatly improve you trading. Soon, all of

this direction analysis will become second nature. You won't even have to

think about it.

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Were not done yet!

Chart AnalysisPrice, as interpreted by candles, is the most important factor to consider on a chart.

Put away the technical indicators. You do not need them. Technical indicators serve

one purpose: to confuse novice traders! There isn't anything on a chart that can be

learned from them. Everything you need to know is right in front of you in the

candles!

Ok, let's go back to our chart example:

There are some very significant things happening on this chart. Do you see them?

You will in a minute. We continue answering questions...

The moving averages are lined up.

We want the 10 SMA above the 30 EMA and we also want there to be plenty of

space in between the two moving averages. This creates theTraders Action Zone

(TAZ) that we can trade in. If the moving averages move too close together, then atrading range or basing pattern will likely develop. We don't want that!

There was a breakout recently.

This is good! We want to buy a pullback as close as possible to a breakout as we

can. Why? We want to know that there is interest in a stock. Remember that

institutional traders have to accumulate shares over time. They can't buy tons of

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shares all at once. They have to buy a little at a time. By looking for break outs, we

can expect them to have to buy more in the future. This will propel the stock higher.

This is a smooth chart.

We don't want to trade stocks that are whipping around everywhere! That is a good

way to get stopped out on trades. This stock is in a smooth uptrend that can betraded with confidence, and without fear of getting shaken out of the trade.

No significant chart patterns.

In this example, there aren't any significant chart patterns. This is fine. You don't

need any kind of a chart pattern like a cup and handle pattern, or a triangle to trade

a stock. You do, however, want to be able to identify them when they are there.

This could add some weight to the setup and may make us favor one trade over

another.

There are wide range candles in the direction of the trend.

See how at the end of August there are three wide range candles that close near

the top of their range? There was also a wide range candle on the breakout in July.

This is very significant! In fact it may be one of the most significant things on the

chart. Stocks tend to move in the direction of wide range candles.

There is one significant gap.

There is only one significant gap to the upside on the breakout in July. Ideally, we

would like to see more. A better case scenario would be if there was a more recent

gap. Why? Because stocks tend to move in the direction of gaps! Be careful though.

After three or more gaps, a stock can become overbought and may not continue to

move forward.

Professionals are buying weakness.

How do we know this? We know by looking for "tails" or "shadows" at the bottom of

the candles. On the sixth of September there is a tail, and on this day (green arrow)

there is a tail. This is very significant! You want to see that the big players are

coming in to support the stock. You want them to protect you from any downside

risk.

This stock is at support.

This stock has pulled back to a prior high made in the middle of August. This is

identified by the red/green support line drawn on the chart. When a stock pulls back

to a prior high it is known as minor support. It is still a significant support area, justnot as significant as if it pulled back to a prior low.

For example, if the stock pulled back to the prior low at $15.68 (see chart), then it

would be major support. Also, notice how the lower trend line and the support line

converge into one right at today's candle (green arrow). This is very significant! This

increases the strength of the support.

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Instead of it taking minutes to look at a chart - it will take seconds!

Remember when we talked about stock

market stages?

Well Stage 2 is an uptrendthat is characterized by a series of higher highs (HH) and

higher lows (HL).

Stage 4 is a downtrendthat is characterized by a series of lower highs (LH) and

lower lows (LL).

This creates a series of peaks and troughs on the chart that you can trade quite

successfully.

Below is the beautiful anatomy of stock trends:

Stocks Trends Versus. Trading Ranges

It is estimated that stocks only trend about 30% of the time. The rest of the time

they move sideways in trading ranges. This is what a trading range looks like: B

map

Yeah, trading ranges can get that sloppy! There is absolutely no reason to trade

stocks that are chopping around like that when you can trade stocks that are in the

trending phases. Trying to trade stocks in trading ranges (stage 1 and stage 3) is a

great way to chew up your trading capital. Stick with trends!

This is a stock in a nice up trend...

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And, this is a stock in a trading

range:

Which one would you rather trade?

Case closed! I know all of this may seem pretty basic but I can't tell you how many

times I've been in a stock trading forum and Joe Trader says, "I bought XYZ stock

yesterday at $32.57".

So I go and look at the chart and the stock is in a steep downtrend! Or someone

says that they shorted a stock at $52.03. So of course I look at the chart and the

stock is in a parabolic uptrend!

It just doesn't make sense to trade that way.If you look at any stockon a chart that is in a strong uptrend, you will find that the

pullbacks are short lived. This gives you a excellent opportunity to buy the stock

before it resumes the uptrend.

Same thing with stocks in down trends. The rallies are short lived which gives you

an excellent opportunity to short them.

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What is Shorting Stocks?When you short a stock, you will borrow the shares from your broker, wait until the

price drops, buy the shares, then return the borrowed shares back and you will

profit the difference. Here is an example:

Microsoft is trading at $30.00 a share. You think that the price is going to go downso you short 200 shares ($6000.00). You are borrowing shares of Microsoft from

your broker at this high price of $30.00. Just as you expected Microsoft goes down

to $20.00 a share.

You decide that you are ready to cash in, so you buy (called covering) the shares at

$20.00. Your broker will now return the borrowed shares to the owner and you will

profit the difference. Since you shorted at $30.00 and covered at $20.00 your profit

is $10.00 a share on 200 shares - $2000.00.

If this all sounds confusing, imagine this scenario:

You buy a new plasma TV for $4000.00 and invite me over to see it. You say that

you have to leave for the day and that I can continue to watch it. While you aregone, I see a commercial for the exact TV that has just gone on sale for $3500.00 -

at the same place that you bought it!

So what do I do? I pack up your TV, grab your receipt, and take it to the store. I

pretend that I am you and complain. The store manager gives me the difference

between the price you paid and the sale price - $500.00. I return the TV to your

house, pocket the $500.00, and you never knew what happened!

It is the same thing with shorting stocks.

From a traders perspective, all of this happens behind the scenes. You just simply

log on to your account and click the sell (or short) button and you have just shortedthe stock. When you are ready to cover, you click the buy (or cover) button and

youre done.

Pretty simple right? Not so fast.

There are some things you need to be aware of...

You must have a margin account to be able to short stocks.

Your online broker may not have enough shares available for you to short.

If the stock pays a dividend while you are short, YOU will be liable.

Is Shorting Stocks Ethical?Some people claim that shorting stocks is un-ethical because they are contributing

to the stock price going down. This is bogus! Remember that after you short a

stock, you then have to buy it back! This creates buying pressure on the stock.

Short sellers slow the rapid decline of a stock by buying to cover on the way down.

If the short sellers were not involved in the stock, it could plummet! Also, short

sellers can be caught in a "short squeeze".

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What's a short squeeze?

This happens with a stock that has heavy short interest. Let's say that a lot of

traders are short a particular stock. If the stock begins to rise rapidly, then short

sellers will get nervous and want to buy (cover). This could add significant buying

pressure to the stock, encourage new long positions, and make the stock explode!

There is nothing wrong with shorting. It's just part of the everyday workings of the

stock market.

Should I Short Stocks?

I think it is almost essential that a swing trader learn to short stocks. Buying stocks

is only half of the equation! If the market in general is in a downtrend, you are not

going to want to be buying stocks. So in order to make any money you need to

learn the art of shorting.

Learning to short stocks will also help you to better understand where reversals will

take place. By shorting stocks yourself, you will be able to gauge where other

traders are going to short stocks and cover their positions.Sometimes you can make money faster by shorting than by buying. Why? Because

stocks typically go down at a faster rate, then when they go up! Fear is a much

more powerful emotion than greed.

The general public only plays the long side of the market. They do not realize that

you can make money when stocks go down. They think that if a stock goes up, then

this is "good". If a stock goes down, then this is "bad".

Wrong! It depends on which side (long or short) of the market you are on.

I think Wall Street really doesn't want the public to know about shorting stocks. In a

bear market, the professionals on TV talk about how "horrible" the market is to

encourage investors to sell.

They are shorting stocks and profiting all the way down.

How to Short Stocks

When you short a stock, instead of waiting for a pullback, you are looking for a rally

into theTraders Action Zone.

Take a look at the following chart:

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You can see that the 10 period moving average is below the 30 period moving

average. Also, the stock is trading below the 200 period moving average.

This stock has rallied up into the TAZ and formed a swing point high which is part of

our normal entry strategy. That is where you will want to sell short this stock. So

you are really just trading the opposite of how you would trade long positions.

That's it! Once you begin to short stocks, you will begin to get more comfortable

with it. It won't make any difference to you whether we are in a bull market or a

bear market.

You can now make money regardless of direction!

----------------------------------------------------------------------------------------------------------------------------------

This is the basic price pattern that is used to enter stocks. Once you become

familiar with it, you can try out more advanced strategies based on the specific

pattern that you are trading.

More on that in the Chart Patterns section.

With your entry strategy, the first thing that you want be able to do is identify swing

points. What's a swing point you ask? This is a pattern that consists of three

candles. For entries on long positions, you look for a swing point low. For entries on

short positions you look for a swing point high.Swing Points

For a swing point low, the first candle makes a low, the second candle makes a

lower low, and the third candle makes a higher low. This third candle tells us that

the sellers have gotten weak and the stock will likely reverse.

For a swing point high, the first candle makes a high, the second candle makes a

higher high, and the third candle makes a lower high. This third candle tells us that

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the buyers have gotten weak and the stock will likely reverse.

Here are pictures of the candles to help you better understand swing points:

For

our long entry strategy, we are trying to find stocks that have pulled back into the

Traders Action Zone that have made a swing point low. Like this:

You can see on the chart above that this stock is in a nice uptrend with the 10 SMA

above the 30 EMA. The stock has pulled back into the TAZ and made a nice swing

point low (highlighted).

See how the pattern consists of a low, lower low, then a higher low? Great! Our

entry strategy would be to enter this stock on the day of the third candle.

Now lets look at a stock on the short side. We are looking for a stock in a nice

downtrend with the 10 SMA below the 30 EMA. Then we wait for a rally into the TAZ

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that forms a swing point high.

Like this:

See how the pattern consists of a high, higher high, then a lower high? We would

look for an entry on the third candle.

Consecutive Price Patterns

Ok, now check this out. Look back up at the first chart where the stock pulls backinto the TAZ. You will notice that the pullback consists of three consecutive down

days with lower highs and lower lows.

That is what you want to look for in a pullback. You can buy the stock the first time

it trades above the previous candles high. This will complete the swing point low.

On the second chart, you will see that the stock has three consecutive up days with

higher highs and higher lows. The fourth candles still makes a higher high and a

higher low. The fifth candle finally makes a lower high and a lower low - completing

the swing point.

Pullbacks do not have to consist of exactly 3 consecutive up days (for short trades)

or down days (for long trades.) Sometimes you will run your scans and find stocks

that have more than that.

When you are looking for swing points to develop, you always want to look to the

left of the chart to see if the stock is at a support or resistance area on the chart.

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That will improve the reliability of this entry strategy.

Ok, now that we know how to get into a trade, how do we get out?

These are the two questions that make up your exit strategy. You have to be able to

answer these questions before you can place the trade!

Your Stop Loss Order

A physical stop loss is an order to sell (or buy if you are short) that you place with

your broker. A mental stop is YOU clicking the sell (buy) button to get out of the

trade. From a technical perspective, it does not matter which type you use.

Before you get into a trade you will have a plan that will determine when to get out

of the trade if it does not go in your favor. You are a disciplined trader that always

follows your plan (right?). Whether you use a mental stop or a physical stop, you will

always want to exit the trade when you predetermined plan tells you to.

Note: See this page for why you may not want to use an actual order placed with

your broker.

Where is your stop going to be? First of all you need a stop that makes sense and

you need it to be out of the "noise" of the current activity in the stock.

Look at the average range of the stock over the past 10 days. If the average range

of the stock is, say, $1.10, then your stop needs to be at least that far away from

your entry price. It doesn't make any sense to have your stop .25 cents away from

your entry price when the range is $1.10. You will surely get stopped out

prematurely!

For long positions, your stop should go under a support area and a swing point low.

Like this:

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You can see in the chart above, that the stock comes down into the TAZ and then

reverses with the low at a previous resistance area. We know that resistance can

become support so it makes sense to put our stop under the low of the hammer.

Ok, that takes care of the first part of our exit strategy, now lets look at second

part: taking profits!

Taking ProfitsUse trailing stops! This is an easy and unemotional way of exiting a trade. If this

trade is going to be a typical swing trade with a holding time of 2-5 days, then you

can trail your stops 10 or 15 cents under the previous days low or the current days

low - whichever is lower. Here is an example:

There is a day by day

example of a trailing stop loss order on this page.

If this is a first pullback scenario, then you may want to hold this for a longer time

frame. Having some big winners every now and then will fatten up your trading

account! In this case you can trail your stops under the swing lows (or highs for

shorts) until stopped out. Like this:

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In either case, you should always determine where your stop is going to be and how

you are going to take profits before you get into the trade. Have a solid plan in

place (write it down). This will take all of the emotion out of the trade. Then you can

relax and trade the "map" that you have created. This will make your exit strategy

easy to follow and it will put you on the path to success.

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analyze a share market chart

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