Understanding Stocks

108 UNDERSTANDING STOCKS
As you know, fundamental analysis is the study of the data that
affect a company. Technical analysis, on the other hand, is the study of
the stock price. Short-term traders primarily use technical analysis to
help them make buying and selling decisions, although some savvy
traders also use fundamental analysis. Conversely, it might help the portfolios
of many investors if they double-checked their stock picks using
technical analysis.
Nevertheless, keep in mind that technical indicators and charts are
simply tools—there is no guarantee that you will be profitable, no matter
what method you use or how sophisticated your software or equipment.
It really depends on how much effort you put into understanding
these stock-picking methods.
The Stock Chart
The key to technical analysis is the stock chart. Technical analysts, as
they are called, believe that looking at a stock chart is similar to a surgeon’s
looking at x-rays before operating on a patient. Although charts
are not perfect, in the hands of a skilled technician they do provide
important clues as to when people are buying or selling. You can use
them to help you make statistical assumptions about a stock, or at the
very least, to improve the odds that the trade you make will be successful.
By reading a stock chart, you can receive clues about how the market
will behave in the future and when you should buy or sell.
One of the best reasons for looking at a chart is that it keeps your
emotions out of the decision-making process. You may love the company
and its CEO, but if the chart shows that the stock is weak and is
headed down, you’ll probably want to avoid buying it. The good news
is that it’s easy to find a stock chart on any company you’re interested
in. Every financial television program—CNBC, Bloomberg, and
CNNfn, to name a few—and most financial newspapers, show stock
charts. The media discovered a long time ago that one of the easiest
ways to show the public how a stock has performed is to display a chart.
The first decision you make when looking at a chart is which time
frame you’d like to see. You can select a short time frame—for example,
minutes, hours, or a daily chart. Others prefer a longer time frame—