Friday Morning Reader’s Choice: Choosing A Tool to Read a Chart

Another great question for a readers choice article came from several readers which I will mash up to be: “How do you know which chart or tools to choose?” This is another topic that could be a PhD thesis but I can get you started at least.

Top Down

Start at the top. The first question for many is Fundamental Analysis (FA) or Technical Analysis (TA). This is always a controversial choice. But it does not have to be one or the other, and many successful traders use a combination of both. I have a bias towards TA so will focus on it here. Once you have turned toward the technical voodoo you will soon find that there are many different approaches. Some are Quantitative or Data driven, some Sentiment driven, still others look at Relative Values, and then there are those that look at Charts. That is my main focus. Think you are done now that you have decided to analyze charts? Not so fast.

Now that You are a Chartist

First off I hate that term, Chartist. Almost as much as I hate Flutist or Pianist. It sounds stupid, don’t ever call someone a chartist even if they ask you to. Moving forward you will find that there are at least 10 different types of analysis regularly used on charts. Renko, Kagi, Harmonics, Fibonacci, Elliott Wave, Gann, Andrews, Volatility Based, Japanese Candle Sticks, and Western Patterns to name a few. These can be used over multiple timeframes, 5 minute, 15 minute, 65 minute, daily weekly and monthly charts to derive conclusions. And you cannot stop there. There are derivatives of all this data that allow various momentum studies like RSI, MACD, Stochastics, and Moving Averages to confirm your thesis. This is getting very complicated.

How do you know which chart or tools to choose?

So back to the original question. Now that with 10 chart styles, 5 timeframes and at least 20 derivatives, making for at least 1000 choices how do you decide which is right for each occasion. The process is one I will teach at some college one day. Experiment to gain Experience to determine Relevance to use to Establish Goals and Create Trade Ideas. Simple right? It is not so bad. You already know that you are a daytrader/swingtrader/positiontrader so the timeframe thing is solved. And in fact the fractal nature of all chart analysis takes that piece out of the equation already. From there it becomes what type of analysis you are comfortable with and how it fits the price action as to whether you come up with a trade idea suited to you or not. This may mean that there is an incredible set up from a mean reversion perspective, for example, that you miss because you are focusing on stocks that are moving out of triangle patterns. And that is ok. You do not need to trade every stock in every style. You do not even need to trade every day. Through practice you will grow more comfortable with more styles and build your tool box. You will be able to look at a chart and recognize an almost ‘W’ that is either a Bat or Gartley Harmonic.

So How do you know which chart or tools to to choose? Like Pornography, you will know it when you see it.

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