Why Chart Reading is the #1 Skill You Must Acquire

Most investors get it WRONG. They usually start with fundamental analysis. They learn to measure a company’s profitability and compare stock prices to earnings. But what about chart reading? Often, it’s ignored. Why? Maybe because many investment experts don’t know how to read charts or think it’s just voodoo.

And chart reading is far from voodoo. It’s an essential skill that, once mastered, drastically boosts your trading efficiency. Can charts really replace news? Absolutely. Charts are the news without the noise—they show what’s happening now, not just what happened.

Later in this post, we’ll explore one case study and how charts give you the real scoop on market trends, and why you should start relying on them more than the talking heads on TV. Stay tuned to discover how to turn charts into your secret weapon in stock trading.

Setting the Stage: My Vertex Pharmaceuticals Journey

My trading adventure with Vertex Pharmaceuticals kicked off on March 2, 2022, and what a ride it was! By the time I joined in, the stock was already soaring, having broken out from its base four months prior. This signaled a strong uptrend. What could possibly go wrong? Well, as any seasoned trader knows, every market high has its twists and turns.

Before Taking the Plunge: My Analysis

In the days leading up to my big move, I was deep in analysis. The stock’s bounce from the 50-day simple moving average wasn’t just another number—it was the heartbeat of the market, throbbing with potential. The trading volume wasn’t making headlines, yet there was a clear upward trajectory. Why dive in now? It was a blend of hard data and gut instinct, telling me something big was on the horizon.

And let me tell you, understanding the language of charts is like decoding a secret message. It’s not just about the numbers; it’s about reading the story told through candlestick patterns and moving averages. What does all this mean? It means that the market speaks to those who are willing to listen.

The Big Leap: Executing the Trade

March 2 was the day I took the leap. Buying at $234.95 per share wasn’t just buying a piece of paper; it was committing to a journey. The market responded immediately—prices kept climbing. Was this the validation I hoped for? Absolutely.

And as each price tick unfolded, it told a part of the story. I wasn’t just investing in a stock; I was immersing myself in the narrative of the market, predicting each twist and turn. What would the next chapter hold?

Climbing the Peak and Navigating the Fall

Come April 13, the stock hit its peak. The thrill of success was overwhelming, but what came next? The inevitable fall. The following days were a rollercoaster—ups and downs that tested my resolve and forced me to adapt my strategies.

Navigating this part of the journey required resilience. Each dip was a lesson, and each rebound a test. The market is alive, constantly moving and changing. How do you stay on top? By staying alert and ready to adjust at a moment’s notice.

Closing the Chapter: My Exit Strategy

I closed my position on April 25 as the stock dipped below the 21-day exponential moving average at $267.98. Walking away with a 13.15% gain felt great, but it was bittersweet. Why say goodbye now? Because every trade, like every story, has its ending.

And this wasn’t just about cashing out; it was about saying farewell to a journey that had become a part of my daily life. It was a testament to discipline and the tough decisions that shape successful trading strategies. What did I learn from this? Knowing when to exit is just as important as knowing when to enter.

Celebrating Wins:

Explanations for the Drawing: The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.

Green Line 21-day exponential moving average line (see EMA 21 below)

Red Line 50-day simple moving average line (see SMA 50 below)

Black Line 200-day simple moving average line (see SMA 200 below)

As the market dipped, locking in my profit felt like a personal victory. The unpredictable market threw challenges, yet several elements of my trade excelled. The joy in trading isn’t just about the financial gains—it’s in the strategy that leads to those gains.

Celebrating wins is like a private dance of triumph behind the screen. It’s about recognizing the precise timing of entries and exits, and the skill to navigate through uncertainty. Isn’t trading all about the numbers? Not quite. It’s equally about personal growth and the confidence that blooms from strategic success.

Tactical Approach to Chart Reading

When I decided to buy into Vertex Pharmaceuticals, the stock had been riding a robust uptrend for several months, building momentum that signaled a strong upward trajectory. Why did this momentum matter? It was a clear indicator that the stock was gaining strength, making it a ripe candidate for investment.

Looking for the right entry point was critical. I wanted confirmation that the uptrend would continue. That confirmation came when the stock price bounced off the 50-day simple moving average (SMA). This was not just a random fluctuation—it was a rebound signaling ongoing strength. I seized this opportunity by taking a position right after the bounce, setting a stop-loss just below the SMA to protect my investment.

And then, the stock price shot up. Success? Definitely. But as April rolled around, the dynamics shifted. The price began to decline, testing my resolve and strategy. This is where the 21-day exponential moving average (EMA) came into play. I used it as my trailing stop-loss, a dynamic boundary that adjusted as the stock progressed. Once the stock price fell below this EMA, it was my cue to exit. Selling at this point minimized my risks and locked in gains.

Trading stocks that show not only technical strength but also solid fundamentals is, in my experience, the safest and most reliable method to trade or invest. It combines the best of both worlds—momentum-driven opportunities spotted through chart analysis, and the underlying assurance of investing in a fundamentally strong company. This approach minimizes risks and maximizes the potential for substantial returns, making it a cornerstone of my trading strategy. What will the next trade teach me? Each trade is another step in refining this balanced strategy, combining technical acumen with fundamental analysis.

Wrestling with Lack of Control Over Price Action

Realizing I couldn’t control the market was a humbling experience. It shifted my focus from merely measuring successes and failures to analyzing what I could control. Wrestling with this lack of control is like a perpetual dance with uncertainty, trying to impose some order on the chaos of the market.

And what does this struggle teach? It reminds us that despite our efforts and expertise, we are merely sailors in the vast sea of market forces, navigating the waves with the best tools and knowledge we have. How do we cope with this reality? By embracing the unpredictability and learning to adapt.

The Personal Journey of Improvement

Reflecting on the execution of my trade, which was nearly flawless, I pondered—could it have been even better? This reflection kick-started a deeper commitment to continuous learning and improvement. Trading is not just about honing technical skills; it’s about personal evolution.

What does improvement look like in trading? It’s understanding the psychological triggers, biases, and emotional responses that affect our decisions. The journey of improvement is about becoming a better version of ourselves, not just as traders but as individuals navigating the complexities of the financial world. What will the next trade teach me? Each one is a step further in our continuous path of growth and learning.

Heartache of Missed Opportunities

Watching the stock price soar past $400 stirred a whirlwind of emotions in me. The missed opportunities? They sparked a new drive. Why dwell on what could have been? Instead, they motivate me to dive deeper into market dynamics and highlight the critical importance of proactive decision-making.

Missed opportunities in trading are a bittersweet symphony. They echo the chances we didn’t take, haunting us yet driving us forward. They push us to reassess our strategies, delve deeper into market analysis, and commit to seizing future opportunities. How do we turn regret into action? By learning from what we missed and preparing to act more decisively next time.

The Personal Speculative Saga

Trading is fundamentally a personal speculative saga. Inspired by William O’Neil’s insights, I embraced the speculative nature of all stocks. This shift in perspective has transformed every trade into a personal journey of speculation, learning, and adaptation.

What does this personal saga entail? It’s about accepting that certainty is scarce and valuing the thrill of navigating the unpredictable. Each trade weaves its own story, unfolding with every market tick. How do we ride this wave? By embracing the unknown and adapting continuously to the market’s whims.

terms and definitions

EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.

SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.

SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.

Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.

U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.

RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.

RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.

Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.

Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.

EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.

Overhead Supply: is a stock market term for a large amount of unsold shares at a certain price level, acting as resistance that prevents the price from rising. It occurs when investors looking to sell at break-even points add to the supply, making it hard for the stock to increase in value until this excess is bought up.

The Personal Lesson: Keeping Watchful Eyes

The key takeaway from my experience with Vertex Pharmaceuticals and other securities is the importance of vigilance. Keeping a close watch on my trades and timing my moves precisely has become a cornerstone of my trading strategy. In a market that never stops evolving, intuition and a personal touch are what help me navigate through the uncertainties.

Keeping watchful eyes isn’t just about monitoring movements; it’s about sensing the subtle shifts in market sentiment, understanding the unfolding narrative in real-time, and responding proactively. What does it take to maintain this vigilance? A personal commitment to staying engaged, informed, and ready to act at the right moment.

In conclusion, my journey with Vertex Pharmaceuticals was more than just a series of trades; it was a personal odyssey. Each rise and fall, every victory and missed chance, has woven into the rich tapestry of my growth as a trader. The market, unpredictable as ever, serves as a canvas where I sketch out my strategies, emotions, and learned lessons. How do we navigate such a complex landscape? By staying alert, adaptable, and always eager to learn from each trade.

By the way if you have any ideas or questions, please fill out the form here, and I’ll get back to you.