Why You Should Never Look At Another Stock Chart Ever Again (Yet Still Trade Profitably)

stock chart

Stock charts are a strange beast – they confuse us and seduce new traders in equal measure, and there are a lot of myths built up about how good they are and what they can do for us as traders. Their visual appeal seems to somehow blind us, and we start to think that if we got better at reading the charts, then we could become better predictors of the future.

We need to remember people that we have proven time and time again that we are trading in a random marketplace and just because charts are easy to read and look visually appealing, doesn’t make them foolproof future predictors of stock movement.

I’m going to make a really bold prediction – that stock charts are going to die a death in the not too distant future and that we will continue to trade just as profitably once they are gone! I say you should never look at a stock chart again. Personally I’m looking to remove them from my own trading system altogether.

What Is It That Makes Stock Charts So Appealing To Traders?

Unfortunately, I’ve seen it many times, where new traders feel that somehow having an easy to use, visually attractive chart, with lines on it, provides a magic formula for making winning trades and is somehow a shortcut to doing the proper research and working out the math.

It’s just not that simple. The patterns need to be taken in context with the psychology of the traders who made all those moves in the past. Also, the global nature of markets makes stock charts even more unreliable because your stock can be affected by assets you can’t even track.

For them to cover all aspects the charts would become incredibly unwieldy and complex and you’d end up wasting all your time just trying to work out what they mean.

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Are There Any Benefits To Stock Charts?

Sure there are! For one thing, they are pretty nice looking and the colors and bars make it easy to see clearly what is going on in the market right? For a beginner investor it is a GREAT way to get involved with trading. Studies are a huge driver in our visual world of understanding. There are thousands of technical analysis studies out there and we’ve covered some of the best ones in detail on this blog in the past.

However, for all that studies measure and do for trading as a whole they still fail to produce profitable traders? Why is that? The fact is, they are nice-to-haves but you can trade perfectly well without them.

Finding Meaning From Past Events

You see, both stock charts and technical analysis studies are data plotters – they use historical data plotted out on a graph, with stocks it could be pricing data, or with technical analysis it could be the overbought and oversold ranges.

However, what happened in the past on its own, is not necessarily a reliable predictor of what the possible future movements of the stock might be. The foundation of such analysis – using past performance as a guarantee of expected future results – is in itself flawed, since historical patterns won’t necessarily hold in the future.

One thing you quickly learn when trying to predict the future using stock charts and technical analysis is the fact that major events completely disrupt such analysis immediately. Technical analysis couldn’t be used to predict a sudden economic crisis, or a massive problem with a company reputation which hits stock, for example.

I firmly believe we need to move on from these historical figures and start to use forward-looking information. I also reiterate my initial prediction – a few years from now most stock charts will be obsolete for the retail trader.

On Wall Street, the major traders don’t use charts – they trade lots of small positions and work the probabilities. Probability figures and implied volatility are both forward-looking data points that help determine future moves and ranges. What so many traders seem to have trouble understanding is that the move can go in either direction. Besides, picking the right direction is not as cool as being profitable!

 

Profitable Trading Is In The Numbers

Options trading has always been and will always be a game of numbers – balancing the risk management and the probabilities. Charts be damned… the average trader will learn the hard way eventually that stock charts don’t help them make money. While the charts may be a lot more visually appealing than say, working out a risk management process, charts will not help to preserve a traders profit when the market moves against them. The risk management process will.

So I urge you to test this out for yourself. Try NOT to look at another stock chart for just one day and see if you can still decipher a great trade setup from a poor trade setup? If you can, then ask yourself why you are wasting all that time interpreting charts!

If you’ve been part of our membership program, I’m sure you’ll surprise yourself with how fast and easily you can spot good trades using probability and risk management processes, and you will never need to look at another chart again.

What’s Your Take? Add A Comment!

I’ve rambled on now about the death of stock charts, but I’d love to hear what you have to say. Add your comments below this post and let me know if you think stock charts are here to stay or will they be gone soon?

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

  • José Francisco

    Hey Kirk but in the graphs we know that we don’t know whais gonna happen but it is a statistical analysis that helps using indicators, like RSI, MACD, TTM Wave, or there some others that I’ve been missing?

    • Yes those indicators can help give a general idea of possible direction but at the end of the day it’s still a 50/50 probability move.

      • José Francisco

        Hey Kirk another thing, on a vertical spread trade that is going to pass the break even for the losing side, how many days you let it move to make an adjustment?

      • I would leave it all the way up until the week of expiration if needed since it’s a risk defined trade.

      • José Francisco

        Kirk, how do you scan for stock for new trades. Do you have a watchlist?

      • Yes I have a short watch-list of about 35 stocks I checkout daily (once in the morning and once at night)

      • José Francisco

        LOL, how much for the watchlist?

      • Nothing – I’ll send them to you if you just email me.

      • Haka Lau

        Kirk Could you send me a copy of it also?

      • We posted this for free a while back but it’s now available for purchase inside the membership area.

  • L B

    I can agree & disagree here but only because I can trade successfully in a bull market. In a bull market, i have a better degree of predicting an upward pattern based on chart? maybe not..but volume as an indicator. I will never short a stock for several reasons. Shorting a stock is not the opposite of being long. The psychology and risk is completely different. So, how can I make money if I’m in a bear market? By using options. I like the idea of creating a call spread etc to create an array of probable outcomes. That is where I agree. However, as a good trader in a bull market, i am in my comfort zone. I do believe that your idea works across all market conditions. Harder to get this across in a bull market.

  • John Andres

    After ten years of education and huge investments in trading education, I have found that “probability based trading” has been my solution to becoming consistent. I sell volatility and must confess that 2013 was a challenging year for volatility sellers, but I still managed a profit and really proved the concept to myself.
    I look forward to a return of a normal, two-sided market, I have basically eliminated TA and FA from my underlying selection and now focus on strategy.

    • Wow thanks for the insight John and yes I agree 2013 was a tough year for IV traders.

      • John Andres

        I have been writing some content for my blog and have begun to develop some course modules. Perhaps we can compare notes.

      • Anytime John! What’s your blog link?

      • John Andres

        Kirk, I posted a couple of links to my Postwire site but it is marked as spam … I am not sure why?

      • Didn’t see them come through but I’ll check on them for you.

      • John Andres

        ok, perhaps because they were links that they got blocked. I have a new website that I am anxious to get up, but the developer left me high and dry…..so I am trying to find someone with expertise in Adobe Muse to assist me. Then I should have a direct link to my content

      • Gotcha – I did everything in wordpress and highly suggest using that. Let me know if you need help getting it set up.

  • Try this link and let me know if works: http://tos.mx/sZejYI

    • José Francisco

      Mr. Du Plessis you are really great on your kindness. Yes it works really good. Thanks!!!

      • Great! I was actually testing out the new feature that TOS had for sharing watch-lists.

  • Dave Palmer

    I admit that I don’t have options experience but through a screener I have used stocks to consistently make $1 per share after fees and last week I made $398 from chart analysis and a watchlist. I intend on becoming a member this week at OptionAlpha. I believe charts have their value. Open to instruction. Dave

    • Hey Dave – yes they do have their value. I believe it will become more and more of a visual tool to get people engaged but long term charting is becoming less reliable.

  • Patrick

    Kirk, so if you’re suggesting to not look at the charts, where should you begin (assuming you don’t already have a watch list built up)? What criteria would you use to help you identify which ETFs/Stocks to trade against?

  • Wow might be the nicest comment I’ve ever gotten. So glad it helped!

  • Steve Strazza

    Understand your point, but it is definitely not fair to say that studying charts is gone on the professional level. I have worked for a number of very successful hedge funds who use plenty of technical analysis and I do not see why they would stop anytime soon. Not sure who you are talking to… Kirk you also fail to explain why charts are going to become obsolete all of a sudden now. These studies you talk about are nothing new, what makes you think people will stop using technical analysis now all of a sudden if they have not yet?

    • I don’t think that people will stop using technicals ever but I do believe that their importance is dying as more and more people realize that overall they are not that reliable (especially when it comes to options trading). We just finished studying technicals for 20 years and 17.34 million trades and the results are less favorable than trading option probabilities – https://optionalpha.com/signals

  • Could be hundreds of different ways in which they make decisions – ultimately though decisions are made to buy or sell all the time and as long as the market is liquid it’s not going to sway the numbers.