Three Charts Every Trader And Investor Must See | Investing.com (2024)

Understanding the stock market and its potential through the use of technical analysis and historical price events has been proven repeatedly to outperform all forms of fundamental trading styles. The following is a story that walks you through my experience, the shift in my mindset and how I came to the conclusion that the three charts I share in this article are critical to your understanding of to make money in today’s market!

When I first learned to trade, I got all caught up with researching companies and finding the ones with the best earnings and future growth. I did that for several years after studying and following many “professional traders” who said it was the best way to trade and invest long term. We lost our shirts during the 2000 bear market by continuing to trade on fundamentals as stocks fell in value week after week. Even the companies that showed quarterly earnings growth fell in value – none of it seemed to make any sense to me, and it was very frustrating.

Losing money when buying the best companies made no logical sense, making me step back from the markets and ask myself, ‘what am I doing wrong here‘. People today are asking themselves the same question given today’s dizzying markets:

· Tesla (NASDAQ:TSLA) shares fell from $971 a share down to $347, whopping 63% drop, in only a few weeks and then rebounded again too xx

· Netflix (NASDAQ:NFLX) is down 30%, even though people are stuck at home desperately trying to find things to watch)

· Amazon (NASDAQ:AMZN) has fallen 26% in the past couple of weeks despite soaring demand for their delivery services

· GDXJ, the gold miners sector that is typically a safe haven during times of volatility, crashed 57% even though gold is usually a safe haven during times of volatility.

So, what was I doing wrong? I started calling and visiting traders who were making money during the bear market to see what they were doing, and 100% of them were doing the same thing – Trading with Technical Analysis. I wasn’t doing anything wrong, per se. I was simply using the wrong tools and analysis for success!

What is Technical Analysis? In short, it’s the study of price, time, and volatility of any asset using price charts and indicators. Traders use technical analysis to find cycles and patterns in the market and trade on the analysis of preferred indicators as opposed to the fundamentals of a company and/or the economy in general.

When you start studying technical traders, you will notice every trader has a particular time frame, a preferred set of indicators, and trading frequency that fits their unique personality and lifestyle. Their brains can see the charts in ways you and I may not see them to predict future price direction over the next few hours, days, weeks, or months ahead. I quickly learned there are infinite ways to trade using technical analysis.

Chart 1 – Human Psychology Is What Drives Price Action

This chart is my favorite as it explains trader and investor psychology at various market stages. It also includes a simplified market cycle in the upper right corner, letting you know where the maximum financial risk is for investors and the highest opportunity for a trade.

Chart 2 – 2000 Stock Market Top & Bear Market That Followed

The chart may look a little overwhelming, but look at each part and compare it to the market psychology chart above. What happened in 2000 is what I feel is happening this year with the stock market sell-off.

In 2000, all market participants learned of at the same time was that there were no earnings coming from their darling .com stocks. Knowing they were not going to make money for a long time, everyone started selling these terrible stocks, and the market collapsed 40% very quickly.

What is similar between 2000 and 2020? Simple really. COVID-19 virus has halted a huge portion of business activity, travel, purchases, sporting events, etc. Everyone knows earnings are going to be poor, and many companies are going to go bankrupt. It is blatantly clear to everyone this is bad and will be for at least 6-12 months in corporate earnings; therefore, everyone is in a rush to sell their stock shares and are in a panic to unload them before everyone does.

Chart 3 – The 2020 Stock Market Top Looks To Be Unfolding

As you can see, this chart below of this year’s market crash is VERY similar to that of 2000 thus far, it’s based on a similar mindset, which is the fear of losing money, which causes everyone to sell their positions.

I am hopeful that we get a 25-30% rally from these lows before the market starts to fall and continue the new bear market, which I believe we are entering. Only the price will confirm the direction and major trend to follow, and since we follow price action and do not pick tops or bottoms, all we have to do is watch, learn, and trade when price favors new low-risk, high reward trade setups.

It does not matter which way the market crashes from here, we will either profit from the next leg down, or will miss/avoid it depending on if we get a tradable setup. Either cause is a win, just one makes money, while the worst-case scenario just preserves capital in a cash position, you can’t complain either way if you ask me.

Concluding Thoughts:

In short, is if you lost money during the recent market crash, then you likely have not mastered a technical trading strategy and do not have proper trade management rules in place. All traders must manage risk and trades to be sure you lock in profits and limit losses when prices start pullback or collapse. Without either of these, you will not be able to achieve long term success/gains, and that’s a fact.

While we can all make money during a bull market when stocks are rising, if you cannot retain or grow your account during market downturns, then you may as well be a passive buy and hold investors. You are better at riding the emotional investor rollercoaster without wasting your time and effort as a trader if you are not going to spend the time and money to learn to follow someone to become a successful trader. Without proven trading strategies or someone to follow, you are more likely to underperform a long-term passive investor.