Editor’s note: Today’s article is a sneak peak of the presentation I intend to give at this April’s Black Diamond Conference. Twice a year, myself and some of the foremost investing experts in the business gather at a luxury resort to present the latest in market analytics, trends, and trading strategies. While the conference is sold out at this time, I’ve arranged a way for you to still view all of the presentations at a discounted price! To reserve your spot at the special pricing and see all the details, click here.
I love to cook. And that’s predominantly because I love to eat.
Cooking is all about putting different flavors together in a way that delights all five senses.
And yes, one can cook from a set recipe and get a good outcome. But it’s only be learning why different ingredients and cooking techniques work when put together are you able to both understand why the recipe works and to improve on it, especially when the ingredients we have vary from region to region and season to season.
I find the same is very true in trading and investing. There are core trading strategies that have proven over time that they work – like a good recipe.
But because markets vary (like the ripeness of an avocado or orange does), if you understand the key elements of the strategy, you can understand why it’s working better or worse now than usual – plus you’ll know the small tweaks that can make things work better based on the current market environment.
With that in mind, I wanted to send you a quick note today some new research I’m doing.
I believe that anyone, by using just four things, can master the reading of a chart. Those four things (as if you haven’t guessed it from the title) are Trend, Speed, Eyeballs and Range.
I came to this conclusion after being asked over and over again to help people learn how I read a chart to develop an expectation for how to profit. There are lots of strategies and thought processes that I use, but when I really did a deep dive and brought everything together, it all came down to Trend, Speed, Eyeballs and Range. Over the next weeks and months we’re going to dig deeply into each of those but first, let me give you a very 10-Minute Millionaire-like concise description of each of the four.
Trend: This element tells us what direction the security being charted is going. There are lots of ways to look at trend, but the bottom line is this: for the timeframe we’re considering, is the stock going up, down or sideways?
Speed: This is where we look at the momentum of the current move. We do this by asking a two-part question: How far has the stock gone, and how fast is it moving? By asking, “How far and how fast?”, we learn a lot about whether the current direction can be sustained.
Eyeballs: This item is like the Sesame Street song “One of these things is not like the others” because it is not a normal way to think about chart reading. That is, until you understand what it is. Then you’ll come to find it might be the most important thing. The concept is simple: It asks the simple question, “How many people are looking at this price level right now?”. There price levels or zones that are more important than others, and that’s because traders and investors expect prices to react at certain levels. There are more eyeballs on a chart as price approaches important support and resistance levels, moving averages, and other well-known indicators. Knowing them helps us identify, in advance, key reaction areas.
Range: This is one of my favorite aspects of an individual chart – and as a bonus it is one of the most overlooked and misunderstood aspects of trading. Volatility is one of the few things that I’m comfortable saying that most financial types get consistently wrong (because they’re a smart bunch, as a whole). Getting a stock’s range (or volatility) right, therefore, gives us a consistent edge in the market.
I look forward to digging into each of these elements with you in future articles so that like a good cook becoming an excellent chef, you too can learn how to master charts reading for great enjoyment and delightful profits.
Great Trading and God bless you,
D.R. Barton, Jr.