Chart reading and investing go hand and hand like School & Text Books. You wouldn’t study for a test without reading the text book and reviewing your notes? The same is true in the market, if you are trading without looking at charts you are taking a test blind and you will ultimately fail.
Below I will show you two charts of the same stock. The first chart will be just of the price action to see if you can spot the pattern. In the second Chart I will show you what a trained eye can pick out and how to turn practice into profits.
Let’s look at the chart of Conoco Phillips (COP)
Alright, doesn’t look like much to the naked eye right? OK, now let’s look at it from a technical analysis.
the blue box is called the trading box also known as the “channel” because the stock stays within a defined range.
the top line of the box is known as “resistance” a term you should get familiar with if you are serious about trading. Resistance is the area where traders feel the stock is not worth the price (overvalued) and begin to sell thus making the stock hard to break through to new highs and ultimately sending it lower.
The bottom line of the box is known as “support” another term you should get familiar with if you are going to last in this industry. Support is the area where traders feel the stock is a great buy (undervalued) and begin to come in and buy (support) the stock thus putting the brakes on the downward momentum and ultimately sending the stock back up.
The trading range is the range in which the stock stays thus letting you how much you stand to make per one revolution of this stock hitting support and resistance. For example on the green buys which is roughly when the stock is trading around $68, it then roughly six days later trades around $74 dollars. That is a $6 “Trading Range” Doesn’t sound like a lot of money but if you owned 1,000 shares of this company or 10 options contract’s you would stand to make $6,000 in 6 days. Notice the stock has performed this pattern on 3 occasion which means if your timing was correct in a perfect world and you caught all 3 revolutions you would stand to profit $18,000 in one month. Now does $6 still not sound like a lot of money?
Most people say “a picture is worth a thousand words” well in the investment community we say “a picture is worth a thousand dollars.”