A person who has a full-time job and trades stocks part-time in the evenings (or even during breaks from work as the employer allows) must establish an efficient routine to expand trading expertise and skills. Evening hours are precious hours, and the trader will want to use the time well. One part of the typical evening work should be stock chart research.
Chart Research Should Agree With Trading Strategy
With thousands of publically trades companies, and multiple time frames for price charts, the trader could spend hours every day just looking at charts and be no further ahead afterwards. To use chart research time efficiently, the trader needs to focus chart research on the trading system and strategy being used.
Most traders trade stocks (and options or even futures) according to a system. The amateur trader, especially when new to this profession, will follow a system developed by others, or at least a system with a narrow focus. Examples of such systems are:
- Trade one stock only; learn to recognize it’s price movements
- Trade a handful of stocks
- Trade an index (or a handful of indexes) as a stock. This will actually be exchange traded funds (ETF) which seek to mimic a particular index.
- Trade under the direction or teaching of an online trading “guru”. Many of these us the Internet to identify pupils and conduct virtual classes to train traders in the system, and maybe give on-going coaching.
- Trade a published strategy, such as the Dogs of the Dow. Many of these strategies exist, and can be found in print or on-line publications.
- Trade a specific price movement strategy, such as a pullback in a trend. This requires a stock screener.
Many other theories/systems/strategies exist and are available to the part time trader, often for a fee but sometimes without. Once the trading system is selected and in place, chart research can be limited to that, and a finite amount of time set aside for it.
Goals of Stock Chart Research
There are several reasons for the part time trader to conduct stock chart research.
1. To assess the overall direction of the market, so as to determine whether to seek out bullish or bearish trades.
2. To recognize how price and volume patterns set up and move from beginning to end. This will give the trader greater confidence that technical analysis has validity.
3. To learn the movement of particular stocks.
4. To prepare to branch out into another trading strategy, thus becoming a more complete trader.
5. To plan out specific trades, identifying entry point, risk-reward ratio, exit point, and stop loss points.
Example of Chart Research
The figures accompanying this article demonstrate how stock chart research could be applied to one narrow situation. The stocks are all of the Standard & Poor’s 500 Index, which is a broad measure of the larger publically traded companies in the US (including some international corporations). Study of the charts of this index are frequently used to assess the overall direction of the market. They can also be used to trade an ETF that mimics the S&P 500, or options in that index.
The attached charts are candlestick style, or the following time frames:
- 6 months, with daily candlesticks
- 3 years, with weekly candlesticks
- 1 month, with hourly candlesticks
These three charts allow the trader to assess the trend of the large-cap market. Looking at the price candlestick for June 9, 2020 (the last candlestick at the right on the chart), the day was an down day, in that the index closed below it’s open. This followed a modest up day, but also two strong down days. A third down day out of four would appear to be a bearish sign. However, note that the intraday high low were higher than the high and low of the previous day, which is a bullish sign.
The monthly chart with hourly candlesticks confirms that at least part of the day, the first part, saw the index rise, while the last several hours saw it fall. At the end of the day, it was above the low of the previous day. Study of this type of chart pattern would indicate to the trader that the next day could go either way, but that the index appeared to be poised to see price rises the next day. That is in fact what happened. On June 10, 2020 the index rose nearly 3 percent.
The three year chart is a way to assess where the index stands relative to a longer history. It is in a fifteen month uptrend, albeit an uptrend that looks to be weakening and possibly coming to an end. This research, when combined with looking at other factors, might convince the trader to be ready to be making trades that will capitalize on a down market.
Stock chart research is sometimes associated with specific trades. However, it is also for the purpose of helping the trader have a greater knowledge of price movements, and greater confidence in technical analysis as a valid basis for stock trading.