HOW TRADERS AND LONG-TERM INVESTORS UTILIZE STOCK CHARTS TO ACHIEVE FINANCIAL FREEDOM!
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
I review about 20 or more stock charts EVERY day. The reasons:
- To identify potential trades and investments
- Looking to sell a losing trade or investment
- Need cash for a real estate or other investment
- I enjoy reading stock charts. We all have hobbies; this is one of mine!
I may spend only a few seconds or spend hours studying a single company.
LONG-TERM INVESTORS VERSUS SHORT TERM TRADERS
LONG TERM INVESTORS
“The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds, and other investment instruments. Investments often are held for a period of years, or even decades, taking advantage of perks like interest, dividends, and stock splits along the way.” {Reference- Investopedia}
Warren Buffett is a famous long-term investor who reads charts (and more research) to decide which stocks to buy and when. Mr. Buffett buys shares in businesses he believes have sustainable competitive advantages. I referred to these in an earlier blog as “GOAT” stocks. {See below} Buffett typically buys when he spots a discount, and the stock is trading for less than he believes it is worth. He holds companies’ stocks for an average of eight years and has held many individual companies’ shares for several decades.
IN FIVE YEARS, BUFFETT MAKES 400 PERCENT GAINS BY INVESTING IN APPLE!
Here is my attempt at Warren Buffett-type analysis. Buffett believes Apple has a sustainable competitive advantage over its competition. In May 2015, Apple was trading for ~$32.00 per share. By May 2016, Apple shares dropped to ~$23.00 per share, representing a 28% reduction, making this is a significant discount. Buffett invested about $230 million in Apple in May 2016 and added another $36 billion over the next several months. later. As of April 2021, Buffett’s $36.23 Billion investment is worth ~$134 billion, achieving an ~400% gain over five years. This is the power of compounding. Compounding is one of Warren Buffett’s secret powers.
SHORTER TERM INVESTMENTS – TRADERS
“Trading involves more frequent transactions, such as the buying and selling stocks, or other instruments. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period.” {Reference- Investopedia}
SOUTHWEST AIRLINES
Let’s examine this stock as a Trader. In March 2020, we experienced a global catastrophe known as Covid 19. As the above chart demonstrates, Southwest Air stock price dropped from a high of ~$58.00 per share in mid-February 2020, to a low of ~ $23.00 per share by middle May 2020. Analysis of the charts shows by May 20; the stock has bounced to $28/share. The trader buys at this point. A short-term trader may exit in a few days/weeks/months, and a longer-term trader may still be in this trade. On April 1, 2021, Southwest closed at $61.30, yielding a 167% return, for a Trader still holding the stock.
LEARNING TO READ STOCK CHARTS
Stock charts show daily price and volume history and can de set to show minutes to decades. The purpose of reading a chart is to find one of three patterns: UP; DOWN: SIDEWAYS—the more important question which direction next.
You can find hundreds of books at your public library or Amazon on reading stock charts. This blog will discuss the basics of reading stock charts. If you are serious about investing your HARD-EARNED MONEY in Stocks, ETFs, Mutual Funds, etc. BUILD YOUR COMPETENCY!
Free references to find a specific company, ETF, or Mutual Fund stock charts:
- Google Finance.
- Yahoo!
- Morningstar
- Investment Websites Such as Fidelity; Vanguard; Ameritrade; E-Trade; Etc.
STOCK/EQUITIES CHART REFERENCE SOURCES
- Google. You will find thousands of articles
- Books I Read:
- How to Make Money In Stocks” – William J O’Neil
- “Unstoppable Prosperity” – Charles Payne.
STOCK CHARTS SHOW SUPPLY AND DEMAND
Like any commodity, supply and demand cause changes in prices. When the Biden Administration stopped fracking on government land, we saw oil prices increase. By halting drilling on federal land, it reduced the supply of oil. With less oil available, other suppliers were free to charge more. Hence, we are now paying more for gasoline.
If there is more supply than demand, the price goes down, and the Sellers win. If there is greater demand than supply, the Buyers win, and the price goes up.
Let’s look at Amazon’s chart and see if the sellers or buyers won on March 11, 2021.
This is a three-month chart for Amazon. March 11, 2021, Amazon opened at $3,104.01: it had a high point of $3,131.75; a low point during the day of $3,082.93 and a closing point of $3,113.59. The stock increased by $30.66, or as the above chart shows, 1.83% by closing. There were more buyers than sellers. The buyers won.
FOUR TYPES OF CHARTS – PICK YOUR FAVORITE
Line Charts: Track the price movements of a stock using the last price of that stock.
Mountain Charts: A financial chart or graph with peaks and dips, making it look like the side of a mountain. The space below the line is filled in with color.
Bar Charts: Take the highest and lowest prices of the day plus the closing price of a stock to chart its trend.
Candlestick Charts: Typically use green boxes to indicate periods when the stock’s price closed higher (bullish) and red boxes when the stock closed lower (bearish) than the previous day. This is the most popular type of stock chart today.
CANDLESTICKS
If you ever look at any stock market reports on television, you usually see the candlestick chart. Because the candlestick chart shows the stock’s open, high, low, and close prices each day, I prefer this chart.
The thin part of the stick is called the “WICK”. The wick shows you the high and low for the day. The wider portion above is the “CANDLE BODY“. The candle body shows the open price and closing price. The open and close prices determines if there was upward or downward momentum for the stock.
The Bullish candlestick above is green. It shows the opening price at the bottom and the higher closing price at the top. If the stock closes down for the day, the candlestick is typically depicted as red. The stock opens at the top of the candlestick and closes at the bottom of the candlestick. The length of the wicks tells you how much fighting between buyers and sellers occurred.
RECOGNIZING THE TREND
A stock can only go in one of three directions: UP, Down, or Sideways. You have a 33% chance of being right.
UPTREND
Stocks do NOT go straight up, or I would be a Billionaire. Stocks are like young kids. You tell them to go upstairs and clean their room. They eventually get there. But they may take a quick trip to the basement. Then head to the bathroom, the kitchen then FINALLY climb the blasted stairs. Like kids’, stocks going up eventually get to their destination.
DISCOVER INC. SHOWS BOTH UP AND DOWN TRENDS
Discover Incorporated, was in a strong uptrend until something happened. If you own this stock or now have an interest to buy you must research what happened and determine is now a time to sell or buy.
DOWNTREND
Same analogy, but now you want your kids in the basement doing laundry. Eventually, they get there! Lots of yelling may be involved.
SIDEWAYS
Now I want you to think of your kid’s math grade. They bring home a C-grade first reporting period. Then they repeat that blasted grade the next and the subsequent reporting periods. They are going sideways, making no progress. Stocks do this all the time.
I try (the keyword is TRY) to avoid buying a stock going sideways. At least until it breaks the sideways trend and starts to go up.
Below is AT&T’s chart, from July 2020 to March 27, 2021 – SIDEWAYS PATTERN
CONCLUSION – HOW TRADERS AND LONG-TERM INVESTORS UTILIZE STOCK CHARTS TO MAKE LOTS OF MONEY!
Learning to read stock charts was critical to improving my wealth. Today’s blog gives you a brief introduction. Next week let’s continue building chart competency by examining support and resistance.
“A stock support level is a value that the share price has declined to several times but not continued to lower values.”
“Resistance in technical analysis is a price level that a rising stock can’t seem to overcome. Once a stock reaches its resistance level, it often stalls and reverses. Resistance is caused by heavy selling that overpowers buying and typically occurs at specific resistance price levels.”
Being able to identify resistance and support is crucial to determine WHEN OR IF to buy! In a typical week, I examine 100+ stock charts and buy ZERO.
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an N.C. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate, and happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation.As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
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