When I first started trading stocks, technical analysis and charting patterns are what piqued my interest the most. I’ve been trading the stock market for about 30 years now, for those of you wondering…
When used correctly, charting patterns can be some of the best analysis tools in a trader’s toolbox.
But beware… There are a few common stock charting mistakes to avoid that could otherwise cost you a small fortune…
Common Stock Charting Mistakes to Avoid: Sometimes Bad Advice Can Inspire
I once stumbled across an article from a “guru” in the field of charting.
Unfortunately, the advice was terrible. I mean, it was the worst advice I’ve seen in a long time…
It was so bad it inspired me to write my own list of common stock charting mistakes and errors I made during my professional trading career.
This isn’t exhaustive, but I can promise that if you follow my advice, your chart analysis and market timing skills will improve in no time. And you’ll avoid a lot of pitfalls that many traders tend to make… especially when first starting out or learning about technical analysis and market timing.
Mistake No. 1: Your Eye Is the Best Technical Indicator
I was debating whether I should start or end with this common stock charting mistake, but I figured I’d start with it because it’s one of the most important observations I’ve made yet.
Many traders rely so much on technical indicators they avoid or forget altogether that every single indicator is derived from price.
When you’re using indicators, you add an extra layer of analysis between yourself and price.
It’s important to remember that technical indicators are like different colored lenses… Each one offers a different view, but the clearest view is always using a clear lens.
This means the best indicator of price change is done visually because there’s no delay or distortion between price and indicators.
So before you start to use advanced indicators and strategies, consider the fact that every indicator you add to your chart creates a distortion layer between your eye and price.
This common stock charting mistake can hurt your trading, especially when you’re just starting out and learning how to use different indicators…
So keep it simple and start with basic visual analysis.
Mistake No. 2: Extensive Time Frame Analysis
The second common stock charting mistake beginners tend to make is not considering the monthly and weekly time frame analysis.
You’d be surprised at the amount of clues you can get by simply looking at weekly and monthly charts.
The bigger the time frame you use in your analysis, the more meaningful the analysis becomes. And the smaller the time frame you use, the more noise you’ll have.
When looking at monthly charts, you’ll start to see the fundamentals more clearly. And when you start to look at weekly charts, you’ll get to look at real long-term support and resistance lines.
What I typically do is begin my analysis with monthly charts…
I look for strength and the main trend, and then I work my way to the weekly charts to make sure its trend is pointing in the same direction.
Then I begin looking at the daily charts to pinpoint my entry and exit.
I always start out with the monthly charts and I promise if you start that way, your analysis will begin changing rapidly as you approach the daily time frame.
Mistake No. 3: Volume Analysis Is Useless 90% of the Time
I know I’m about to get at least 100 emails telling me I’m wrong on this one… but for the most part, following volume isn’t going to help you make money.
I’ve done at least two dozen volume analysis studies over the past decade, and the only time I find volume working effectively is when I use our premium V-Bounce strategy, which is super effective.
I’ve tried buying on high-volume tests… momentum-volume tests… fading-volume tests… and many others…
But I realized most of these volume tests came out with random results.
The only — and I mean only — backtest that proved to work is the one I linked to above. So don’t even waste your time on this common stock charting mistake or volume analysis when first starting out.
And if you haven’t already, check out my V-Bounce strategy today!
What to Take Away From This Article
Before using complex technical indicators, use your eyes and learn visual technical analysis.
Volume analysis is tricky and tends to be more random than most traders believe it to be.
Once you can easily identify chart patterns, it’s time to transition into technical indicators.
Keep in mind, some of the best traders in the world ditch most technical indicators and rely on their eyes only.
Always use different time frames and don’t think that just because you swing trade, monthly and weekly charts aren’t relevant or important.
This especially applies to the broader market and indexes because stocks tend to follow indexes about 70% of the time on average.
I hope this helps!
If you found this article useful and would like to learn more, be sure to check out A Beginner’s Guide to Stock Sector Analysis and Relative Strength and How to Pick Winning Stocks With Simple Market Analysis Tools.
Senior Strategist, WealthPress