Once you know the basics about how to read a stock chart, it is time to go to a live stock chart and take a look. However, intuition can play dirty tricks on you, and that is why we want to give you some insights about some things you should always do when looking at stock charts.
Look at the biggest extension of time available
It is true that in the stock market what happened yesterday is much more relevant than what happened a year ago, but it is also true that stocks have memory. What was a support or resistance in the past can be one again. Always keep in mind that the big capitals invest mostly in the long term, so old references make sense for them.
Besides, by looking at the biggest extension available, you will spot the biggest trend. A stock rising 50 percent in the last month can seem like an awesome asset to invest in, but maybe it is just rebounding after an 80 percent drop.
The first glance should always be to a long-term chart; and then once you have an overall idea about what is going on, you can look at the shorter term with the right perspective.
Look for increasing tops or decreasing lows
Instead of looking at the chart and seeing how much a stock has dropped and deciding that it is cheap enough to buy, traders look at what the tops and lows are doing. The idea is that if the last top is higher than the previous one, even if there is a correction in the shorter term, the price should continue to rise later. The same idea applies to the lows. If the lows are lower each time, then it is not a good idea to think that now is cheap enough.
For many, buying something after it surpasses the historic max is counterintuitive, but it is usually safer than buying at the lowest history point because you will never know if tomorrow will be a newest record low. Of course, this does not mean that you should run and buy every historic maximum — only that you should respect the trend.
Look for the next support or resistance
If someone asks you what your investing deadline is, chances are you will answer “long-term” or “some years.” However, if the stock falls after you invest and you face some weeks under your buying price, you may get nervous and, for sure, disappointed.
We know what we want, but we do not know our psychology. Unless you have broad experience investing and some weeks under the buying price is not going to make you nervous, the best option is to buy as close as possible to the support or sell as close as possible to the resistance.
Another reason to check the next supports and resistances is because even if the price surpasses the level, it will likely slow down the movement, so it will help you forecast how the next weeks are likely going to be.
*This is not investing advice. If you need it, please ask your financial advisor.