I love to cook. And that’s predominantly because I love to eat.
Cooking is all about putting different flavors together in a way that delights all five senses.
And yes, one can cook from a set recipe and get a good outcome. But it’s only by learning why different ingredients and cooking techniques work when put together that are you able to both understand why the recipe works and to improve on it, especially when the ingredients we have vary from region to region and season to season.
I find the same is very true in trading and investing. There are core trading strategies that have proven over time that they work — like a good recipe.
But because markets vary — much like the ripeness of an avocado does or the bite of peppercorns grown in different regions. If you understand the key elements of a given strategy, you can understand why it’s working better or worse now than usual — plus you’ll know the small tweaks that can make things work better based on the current market environment.
With that in mind, I wanted to send you a quick note today about some new research I’m doing.
I believe that anyone can, by using just four things (or concepts), master the reading of a chart. Those four things (as if you haven’t guessed it from the title) are Trend, Speed, Eyeballs and Range.
I came to this conclusion after being asked over and over again to help people learn how I read a chart in order to develop an expectation for how to profit. There are lots of strategies and thought processes that I use, but when I really did a deep dive and brought everything together, it all came down to Trend, Speed, Eyeballs and Range. Over the next weeks and months, we’re going to dig deeply into each of those but first, let me give you a concise description of each of the four.
Trend: This element tells us what direction the thing being charted is going. There are lots of ways to look at trend, but the bottom line is this: for the timeframe we’re considering, is the stock going up, down or sideways?
Speed: This is where we look at the momentum of the current move. We do this by asking a two-part question: How far has the stock gone and how fast is it moving? By asking, “How far and how fast?,” we learn a lot about whether the current direction can be sustained.
Eyeballs: This item is like the Sesame Street song “One of these things is not like the others” because it is not a normal way to think about chart reading. That is, until you understand what it is. Then you’ll come to find it might be the most important thing. The concept is simple: It asks the simple question, “How many people are looking at this price level right now?” There are price levels or zones that are more important than others, and that’s because traders and investors expect prices to react at certain levels. There are more eyeballs on a chart as price approaches important support and resistance levels, moving averages, and other well-known indications. Knowing them helps us identify, in advance, key reaction areas.
Range: This is one of my favorite aspects of an individual chart — and as a bonus, it is one of the most overlooked and misunderstood aspects of trading. Volatility is one of the few things that I’m comfortable saying that most financial types get consistently wrong (because they’re a smart bunch, as a whole). Getting a stock’s range (or volatility) right, therefore, gives us a consistent edge in the market.
I look forward to digging into each of these elements with you in future articles so that like a good cook becoming an excellent chef, you too can learn how to master charts reading for great enjoyment and delightful profits.
And because you as a whole are a very sharp group of readers (unabashed pandering), I’d love to hear your thoughts — what have I left out? What is something that doesn’t fit in any of these categories? Send your thoughts and comments to drbarton “at” iitm.com.
Great Trading and God bless you,
D.R. Barton, Jr.