In The Trading Cockpit with the O'Neil Disciples: Strategies that Made Us 18,000% in the Stock Market

CHAPTER 4

Developing Your “Chart Eye”

Richard Wyckoff once wrote,

Most of the popular prejudice against charts undoubtedly is due to the fact that many people mistakenly attempt to use charts mechanically—without judgment. They endeavor to draw diagrams or imaginary geometrical patterns on their charts, or apply arbitrary rules or systems such as “oscillators” and other impractical notions. Such methods are wrong. They lead only to errors, losses, and discouragement. Therefore, you must remember this: When you study charts look for the motive behind the action which the chart portrays. Aim to interpret the behavior of the market and of stocks, not the fanciful patterns which the charts may accidentally form.

The Richard Wyckoff Method of Trading and Investing in Stocks by Richard Wyckoff, Wyckoff & Associates, Inc., 1931, p. 2.

Wyckoff's attempt to describe the proper attitude one should take toward the tricky work of interpreting stock charts is very much in sync with our own views regarding the utility of price/volume charts to the investment decision-making process. Learning to develop judgment based on the observation of price movements and their correlation to the context of the current market environment, as well as the motives of investors (primarily institutional investors) at any given time is a critical skill that can only be learned through proper application in real time. Over time, one discerns that certain price movements and behavior are typical for certain types ...