I mostly ignore charts when it comes to stock picking. I say mostly because I do look at them to see what the general trend is and charts are the easiest way to quickly see what the price history of a stock looks like. But predicting the future stock price based on a chart? That is something I stay away from and I’ll tell you why.
Some Investors Pick Stocks Based 100% On Their Charts
Its hard for me to understand how some investors are willing to buy and sell stocks based only on a chart and nothing else. That mean in many cases, they don’t even know what industry the company is in or anything else about the fundamentals of the business. All they care about is the chart.
I would say that anyone who invests like that has to be a short term investor since the chart dictates when they buy and sell. If the stock breaks a certain pattern, then selling is in order so they have to be ready to take action at any time.
Since I buy stocks with the hope of keeping most of them for years, charts have little value to me as I am not going to sell (or buy) based only on a line that goes up or down. I prefer to try to pick stocks of companies that I think are going to do well based on the business they are in and the prospects for it going forward.
Nintendo (NTDOY): Sell Or Hold Based On The Chart?
I own Nintendo stock and it has gone down a little more than 10% in the span of about 10 trading days. If I where someone who pays attention to the charts, I might be tempted to sell because it looks like the stock has broken its uptrend which chartists will tell you is bad. You can see this on both the 6 month and 1 year charts of NTDOY below:
Both of these charts show the stock price diving below the line I arbitrarily added. It does look as though some sort of trend has been broken but does that really mean I should sell? Notice I used the word “arbitrarily” because that is what most of charting is: you can draw lines wherever you want and for whatever time periods you want.
Now look at the line I added on the more scrunched in 3 year chart of NTDOY below. Does that chart also show the stock breaking down through the support line? Or does it show the stock is still in an overall uptrend based on the fact that the line is drawn for a longer period of time? To me it seems that line seems to indicate that the stock is still a hold.
I bought NTDOY last year because I thought (hoped) the Switch was going to be a hit and it has turned out to be a HUGE hit. I also liked the indications that Nintendo was going to start using its incredibly valuable intellectual property in a move toward mobile games and it seems like that is slowly happening. So for me, even though the stock chart may or may not look bad in the recent pullback, I am not going to be selling my 500 shares as I believe the company has excellent prospects for making money ahead of it.
I base my buy and sell decisions on what I know about a company, not what the charts say about it!
Learning About Charts Can Be Difficult
If you want to base your stock buying and selling decisions on charts, there is A LOT to digest. You can put in countless hours learning how to draw the lines that will supposedly tell you what to do. You can pay for subscriptions to websites that will train you what to look for and even provide leads to stocks that might be on the move.
Recognizing generally accepted stock patterns is part of the “skill” that chart investors swear makes them money. There are dozens of these patterns and all will indicate you should take action based solely on the stock chart. Here is a short list of some of the patterns:
Who cares what the company sells, whether it makes money, whether the economy is up or down, or anything else about the fundamentals of any such potential stock investment. If the stock chart pattern says to buy, sell, or hold that is what these chartists do. Its a totally different way to look at stock investing and personally, I have no idea whether it can work or not.
The only thing I know is that I don’t do it and would prefer to make my stock buys and sells based on my intuition and solid information so freely available today about most publicly traded companies. I also want to hold my stocks until I feel something has changed with the company or industry that makes me want to sell them. I don’t want to have to sell solely based on a chart so this kind of investing is not for me!