Hi, this is your Trader of Stocks. The market communicates via a relentless stream of hard to read price and action clues in individual stocks.Learning the language of the market doesn’t help when you lack communication skills. In this brief article you’ll learn the right mindset to become a master chart reader.
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Chart reading vs. ticker tape reading
From books and stories we know that proficient ticker tape reading (the equivalent to today’s chart reading) used to be a rare and hard-earned skill back in the days of Livermore, Wyckoff and company.
A trader observed numbers rushing by on a small tape and the well trained mind translated the real-time clues and formed them into a solid opinion or just a gut feeling. This opinion then served as the basis for the decision-making process.
I believe that a trained tape reader in todays market would probably be at a slight disadvantage over a trained chart reader. This is due to the lack of a price history and the fact that charts makes use of our powerful visual sense.
AS A MATTER OF FACT CHART READING IS TODAY’S EQUIVALENT TO TAPE READING AND IS THEREFORE THE PRIMARY TOOL AT THE DISPOSAL OF ANY TECHNICAL TRADER
Don’t be fooled, chart reading, just like tape reading, is still a hard-to-learn skill and it takes years to be able to draw a ‘profitable’ conclusion from the relentless stream of information it provides. You have to make sure to use the tool correctly from the start, in order to make fast progress on the learning curve.
Here is a piece of advice I want to give you right away.
Work with an uncluttered and clean chart and avoid fancy indicators because they are costly! What that means is that they will consume a large part of your attention and your ability to concentrate, both being limited resources.
Learn how to read stock charts: 7 best practices
This list here illustrates the mindset you need to possess in order to efficiently learn the art of chart reading. Actual chart reading aka the correct interpretation of a price and volume chart is covered in my chart school article series.
- Clean Charts: Work with clean and uncluttered stock charts (read here how to set those up!)
- Screen Time: Grasp how the market really works by constantely being exposed to stock charts.
- Proper Communication: Make sure that communication is not hindered (clean charts, one screen, no guru in your ear…)
- Efficient Time Management: Make it a habit to spend 80% of your time going over price and volume charts
- Quality over Quantity: Accumulate quality practice so that your brain can rewire properly. One chart at a time.
- Keep it simple: Accept that fancy indicators are a hindrance. They make charts lose all the subtle clues.
- Don’t force it: Always be open minded and flexible in order to ensure a laid back conversation with the market.
Have a conversation with the market
In my honest opinion, indicators are simply an ill-advised attempt to shortcut the learning curve and to make sense of a price action chart when you are not experienced enough to do so.
There are simply no shortcuts to the learning curve of becoming proficient in any profession, be it a a doctor, a navy seal, a trapeze artist or a stock trader!
Your brain needs time to rewire and your best bet is to speed up this process by making efficient use of that time!
The older you get, the longer it will take as the plasticity of your brain deteriorates with age. Plasticity refers to your brain’s ability to reorganise or rewire neural pathways throughout your life as a result of experience!
My charts are my way of having a conversation with the market.
And don’t be fooled to think that it‘s a monologue, it is not! You can have a dialogue with the market simply by going over many charts and then watch if price and volume feedback supports or violates your idea.
The following example dialogue with the market might appear goofy but illustrates the idea:
Market: I don’t agree with the price of $MSFT after earnings!
[Trader sees that $MSFT drops hard at the open]
Trader: Alright then! Do you plan to punish other big techs as well?
[Trader opens charts of $AAPL $AMZN $NVDA…]
Market: No, it has to do with $MSFT not meeting my expectations
[Chart shows that other big techs hold up well or even rally]
Trader: But why do you punish some smaller techs then?
[Trader sees that some techs drop with $MSFT]
Market: Because they are in bed together or fly too close to the sun!
[Trader realizes that they are cousin stocks or climaxing]
Trader: I understand! Is the weight enough to sink the ship?
[Trader opens charts of unrelated leading speculative stocks]
Market: No it is just $MSFT don’t worry!
[Leaders find logical support on heavy buying]
Trader: Talk to you later and let me know when things get rough!
[Trader leaves desktop for lunch and sets alarms]
Market: What do I care!
[Internet goes down and stocks drop hard on you]
Always keep the communication alive
Recall that communication among people is most efficient when it is in real-time, in the same language, both-ways and limited to two participants!
The same is true for communication with the market!
It is tough to communicate well…
- …by telephone with a large delay and the same is true with the market were you need instant feedback and quick reactions to your mouse clicks!
- …when you don’t speak the same language. The same is true for the market when you apply indicators which translate the native price action language to something different losing all the subtle cues.
- …when 20 people scream at you simultaneously and it is equally tough to talk to the market when you have 30 charts open flashing signals at you.
- …when you just ramble on and never get to the point. The same is true with the market when you try to listen to every little intraday wiggle on a 1-min chart.
- …when some smart ass is always interrupting you and it is equally tough to talk to the market when you are constantly exposed to a guru whispering into your ear.
- …when the conversation is one sided and the same is true for the markets when you refuse the dialogue by stubbornly watching $AAPL and the Dow the whole day.
As a trader you always seek the dialogue with the market and you must keep the communication alive at all costs. Adhere to the Pareto principle (80/20 rule) and begin to accumulate quality practice hours in chart reading as soon as possible.
Nothing is worst than being stuck with an opinion and refusing to accept feedback.
Do this and you will quickly lose joy in trading or even drop out of the game altogether!
Your risk management and experience will dictate if the conversation with the market feels like a laid-back chat with your best friend, a critical job interview or your plea in court before you are sentenced to a life behind bars for murdering the golden rules of trading…
…again …and again …and again!