Charts are a popular way to make stock trading decisions, however deciding which charts to use and learning how to configure them is critical as you need to match them to your financial goals and objectives. The challenge to using charts is that you can easily be overwhelmed
Charts are available in a variety of ways:
- Online free chart programs
- Charting Software
- Online broker sites with charts
- Chart-based investment software
- Investment programs that include charts
The most common issue is that many people hit a stumbling block when they get to the individual chart settings. Most online sources for charts, even brokerages have default settings. But who do you think benefits most from those default settings?
The keys to using charts for safe investing, the real objective in using charts, is to know when; when to sell a position, when to hold it, or when to buy a new ETF (stock or mutual fund). Sounds simple enough, but do these signals meet with your objectives for growth? Is the frequency required with these signals compatible with the time you have to trade, or look at your portfolio, and do they support your level of risk tolerance?
Let’s look at a Moving Average Chart first.
A moving average chart typically shows two lines, a fast average (F) meaning the average price is calculated over a short time frame, and a slow average (S) meaning the average price calculated over a longer time frame. In addition there is a third line which is the actual total return price line of the particular stock or mutual fund.
Generally speaking, if you’re using a moving average chart and the price line cuts down through both the fast and slow lines, you’re getting a sell signal. Conversely, when the price line cuts up through both lines, you’re getting a buy signal; when it is in the middle it is either a watch signal if you are considering a buy or a hold signal if you already own the stock or fund.
So what setting do you use for the fast and the slow periods when using a moving average chart? That depends on how often you are willing to trade.
Here are some examples:
Trading Schedule Fast Slow
Daily or Weekly F10 S30
Weekly or Monthly F20 S60
Monthly or Rarely F50 S150
Trading daily or weekly may make substantially more trades than people that only trade monthly or occasionally, but they are also reducing the potential for major losses.
The Full Stochastic Chart can also be used to give buy/hold/sell signals.
Without getting overly technical, this chart typically shows two lines:
1) An average price line calculated from two types of moving average (K+D)
2) A trigger line (T). When the average price line crosses the trigger line, signals are generated.
Generally, this is the way the full stochastic chart is interpreted:
- When the price line cuts up through the trigger line, and the trigger line is in the bottom 20% of the chart, it is a buy signal.
- When the price line cuts down through the trigger line, and the trigger line is in the top 20% of the chart, it is a sell signal.
- When the price line is between the bottom 20% and the top 20% of the chart, it is in a watch territory and you should keep your eye on it for a few days before deciding if any action is needed.
Possible settings for the fast and the slow periods when using the full stochastic chart:
Trading Schedule K D Trigger (T)
Daily or Weekly 14 3 3
Weekly or Monthly 35 15 10
Monthly or Rarely 150 50 40
One key question people ask about charts is, “Exactly what charts do I need to look at?” Some investment chart software may have as many as a hundred different charts, and if you talk to ten people who like working with charts you will rarely find any two that look at the exact same charts, so you’ll need to experiment and find the charts that work best for you and your financial goals.
One of your considerations when you’re looking at charts is simply how much time do you have?
If you have a portfolio with eight (8) ETFs or stocks or mutual funds, and want to look at 20 different charts for each one plus look at possible new buys, then you are going to need a lot of time. This could mean you would be looking at more than 300 charts and even if you allotted them only 15 seconds each, it would take you well over an hour to get through them…it makes me dizzy just thinking about it. My advice is let your investment software program do the work. Set up your investment software program it so you can see a chart when you want to with just a click of the mouse or tap of a finger.
Here are my personal setting preferences for two types of charts I’ve discussed above:
Moving Average F20 S60
Full Stochastic K35 D15 T10
Raymond M.F. Dominick is the author of “Invest Safely and Profitably” (Your Success Guide), available from Amazon.