I’d like to spend some time talking about chart analysis, dispel a couple of misconceptions and add my Confident Trader recommendation to the benefits of knowledgeable chart analysis.

Card Counting and Stock Chart Analysis

In casinos, the house always has the advantage. Its slimmest advantage is at the blackjack tables where the house edge is measured at 0.5%. However, if a player is able to predict the likelihood of a high or low card coming next out of the deck, the advantage actually shifts to the player by a small margin. But that small margin, over time, will make the practice of card counting very profitable if you can keep from getting tossed by casino security, even though card counting is perfectly legal.

Stock chart analysis is a lot like card counting. Card counters lose a lot. Sometimes they’ll lose five, 10, even 20 hands in a row. Card counting is anything but a rock solid sure thing. All it does is provide a slight edge to the player who masters the tactics and knows when to place the big bet that recoups all the night’s losses and sends the gambler home a big winner.

Chart analysis is similar in that it provides an indication – and only an indication – of how a stock will perform. True technical analysts (chartists) don’t read the prospectus, don’t know anything about the business or even the industry. Chart readers look to tip the balance ever so slightly in their favor.

If a stock closes above the mid-point daily trading range, there’s a 70% chance the stock will increase in value within three trading days. Conversely, if the share price closes below the day’s mid-range, there’s a 70% likelihood that the stock will drop in price. How do chartists know this?

Thanks to digital technology (and on-line trading) self-directed investors have decades of historical market data from which to pull information. Stock prices, for the most part, move in predictable patterns that can be verified with some statistical surety, but please, note I said some statistical surety.

In the example above, the stock that closes above the day’s mid-range on the outer band has a 70% chance of showing an increase in price. Of course, that means there’s a 30% chance that the stock will fall in price even though the chart says otherwise.

 I’m not a day trader. I don’t know how those guys with five computer monitors tracking markets globally ever sleep. Life’s too short. But, even more germane than my metaphysical musings is my belief that day trading is not a best practice for self-directed investors. There are simply too many variables, even if you and your tracking software identify a buy or sell opportunity based on the parameters you set – the ones you learned from reading an ebook download from somebody you don’t know.

I Love Small Cap Stocks

I love small caps and micro-caps because that’s where growth takes place – and quickly. There are numerous examples in Confident Trader’s Portfolio of four-digit returns within a couple of years. My philosophy, which I espouse bi-weekly, is to find the patterns, track the stock, add to your small-cap portfolio and hold. Buy and hold micro-caps? That’s just crazy talk.

Buy-and-Hold Investing in Small Cap Markets

Chart analysis offers a number of different views of share price performance. I take the longer-term view and look at charts over seven- and ten-year periods to identify long-term trends in past share price performance. These trends tend to repeat themselves at regular intervals.

By taking the longer view of the market that historically has seen the greatest growth, the astute chart reader can tip the scales in his or her favor. No sure things, that is a 100% plain and simple fact. You want a sure thing? Go buy a CD earning 4%. Safe as can be. And you can sit by helplessly as inflation and taxes erode your life savings. Every portfolio requires growth stocks to offset the corrosive power of inflation.

Also, stock investing offers tax-free growth, with capital gains due only when you close out a position.

The Truth About Stock Charts

They are not crystal balls. They are not a sure thing. Sometimes they lie so you can never trust them 100% and they are always open to a range of analyses depending on the investment strategy of the analysts.

A contrarian will interpret the same data from one perspective, a day trader will see the same chart and arrive at a different conclusion.

Charts are only a tool and when in the right hands, they do tip the scales to the investor’s advantage. In the wrong hands, charts can lead to erroneous assumptions that, in the end, can deplete holdings – real FAST.

Buy and hold quality small caps and watch the charts for indications of movement up or down. Run models and stay up-to-date with Confident Trader’s Portfolio. Tip the scales in your direction. Then hold on for the longer term.

Buy and hold quality growth stocks for long-term growth.

Check your holdings periodically and adjust as needed.
 
Then, go play a round of 18.

You own the stocks. They don’t own you.