Doctors use stethoscopes and X-ray machines to see what's wrong with patients. When you invest in stocks, you also need to use the right tools.
"Investors who train themselves to decode price movements on charts properly have an enormous advantage over those who either refuse to learn, just don't know any better, or are a bit lazy," wrote IBD Chairman William O'Neil in ".
While charts can be intimidating at first, with time and practice, you can learn how to properly interpret price and action. You will learn to recognize healthy and constructive action, as well as warning signals.
Learning to use charts is a must for investors who implement the methodology. While fundamentals are important, they don't tell you when to buy and sell. Charts can help your stock selection and timing.
A chart shows price and volume action for an individual stock, exchange-traded fund (ETF) or a market index such as the Nasdaq composite or S&P 500.
Prices are usually shown on the upper part on a chart, while volume — the number of shares traded — tends to lie below.
The most popular is a bar chart, where each vertical line (or bar) represents trading activity for a certain time frame. Charts show action on a daily, weekly, monthly or even intraday basis.
On a daily chart, the highest point on the bar shows the highest price traded for the day. (1) The lowest tip of the bar shows the lowest price traded that day. (2) The horizontal hash mark show the closing price.(3) Some bars show a left-side hash mark indicating the opening price of a stock. For investing the IBD way, however, that information is not critical. The price close is far more important.
Line charts only have a line connecting the closing prices. Candlestick charts show the open, high, low and close in a different visual format. Meanwhile, point and figure charts don't have a volume element. You don't need these types to do well with IBD.
To see free stock charts on Investors.com, hover your mouse over the Research tab, and click on on the right.
Stocks will form bases or price patterns, which are your buy setups. But there are certain nuances in price and volume that make a base buyable or one that you should avoid. Investor's Corner is geared to help you learn the subtle differences between a good base pattern and a faulty one.