How to become proficient in chart reading?

Full question: You mention that you need to put in the chart reading time to become proficient, however do you have any ideas on how to do this? Are there any specific exercises that one should perform? Or certain things to look for while going over charts?

Well the procedure of becoming proficient in chart reading requires a structured long term approach but it’s much easier than what you probably think right now. It can’t be forced however and time plays an important role in this as stated in your question. The basics/details you requested (see Step 1 and 2 below) are too much for a simple Q&A article. Once the service starts the “Charting School” articles will be available.

So here’s generalized approach:

Step 1: Understand the basics of price and volume and how they are “theorectically” related to each other. For this you simply study Wyckoff’s work on the matter.

Step 2: Understand the basics of longer duration patterns. For me this means to understand the work of O’Neil on chart patterns. Even if you don’t trade them you need to be aware of them in order to not run with the #Canslim crowd all the time.

Tip: Here it helps to analyze past monster stocks and big winners in order to learn how those theorectial basic patterns actually look like on a real chart. It is very important to do this for both, the daily and weekly chart. Once you did this for a while you shouldn’t spend much more time going over past winners and simply trade in the present. Your winning edge is to be discovered in real time with all the noise, distractions and uncertainty involved. You won’t find it by only studying past winners. Pareto principle (80/20 rule) can be applied here. I do spent roughly 10 to 20% of my time to study new things or former leaders. This is mostly done by reading new books or rereading old ones.

Step 3: With the knowledge of step 1 and step 2 you then simply go over many many charts and trade those patterns over and over again. Over time you will learn to prioritize all the information you soaked up in those first two steps. This has to be part of your everyday routine as described here in great detail! Going over many charts each day is actually much more important than you think as it is not only about finding fresh trade ideas. By going over many charts one can communicate with the market as a whole!

A good example is the cup and handle pattern. When you trade cup shaped based (I did this a lot between 2010 and 2016) you realize that from all the “required traits” O’Neil mentioned in his books, only a couple are really important and true requirements. This is true for pretty much everything in trading. During your initial study years (You did read many books right?) you are loaded with information but oftentimes have an underdeveloped sense for how important each little piece really is. Trading literature does a great job of making clear that adhering to stops is the number one priority just like people know that brakes on a car are more important than the windscreen wipers.

However not everything is so clear as the stop loss. In chart reading a major performance factor is the ability to spot a change in character in time. This can be a change in the average true range (trading turns tight and coherent/steady) or the takeout of a multi-month trendline.

Once you learned the importance of each clue (Will be covered in an upcoming “Chart School” article series) you then simply let them accumulate until you have seen enough in order to make a trading decision. Sometimes a stock has many bullish clues but they are then killed-off by a single and much more important bearish clue.

This blueprint described above can be generalized. It’s the blueprint to reach mastery in pretty much any craft you want. Research shows that one need to accumulate thousands of hours in order to reach elite level. I found that that profitable trading doesn’t require elite level chart reading capabilities IF one gets all the other aspects right before. You can read more about this here.

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