It’s been about a decade since I first learned that reading a stock chart is analogous to a doctor reading an EKG chart. A doctor should be able to tell whether an EKG chart is normal and healthy vs. abnormal and unhealthy. Similarly, reading a stock chart should tell an investor the same thing — whether a stock is healthy or unhealthy.
My views of this understanding have since changed and I’d like to explain why.
A general assumption is that if investors have acquired the skill of being able to read a stock chart correctly, then the investor should be able to determine an area where they would buy and sell based on the stock chart.
The question I face is this: how does reading a stock chart provide an investor an edge if most other professional investors read the same chart and reach similar conclusions?
To illustrate, let’s say with a skill level of 1 to 10, a professional investor reads a stock chart at a level 9. Presumably, other professional investors who have similar training also read stock charts at a level 9. Therefore, investors should reach similar conclusions.
More importantly, if we agree the stock market rewards investors for having a differentiated view and not a consensus view, then reading stock charts by looking at similar patterns would not provide an investor an edge under the same money management system.
A few thoughts that I struggle with:
Does an investor’s chart reading ability have a positive expected outcome? Is the average w/l ratio less than 50%? If so, then why not flip a coin to decide where to buy and sell? If using the same money management system and rules, wouldn’t this improve the process? (E.g., going from a 40% hit rate to a 50% hit rate should improve the process under the same money management system.)
Additionally, if an investor thinks their chart reading ability is superior, then how did they learn it? Have they read the same chart books as every other investor and followed the same technical analysis?
My thinking is that perhaps reading stock charts does not give an investor an edge, but the real edge comes from not using stock charts.
If an investor must read a stock chart, then perhaps incorporate a form of meta-analysis in reading charts. Meaning, make investing decisions based off what other investors might do and adjust your reasoning and thinking.
These days, I put less emphasis on reading stock charts and more emphasis on the momentum anomaly and Newton’s first law — objects in motion will stay in motion unless otherwise interrupted by an unbalanced force. I think of the latter part in terms of general trends.
If you’d like to express your thoughts differently on this matter, please comment below.