Reading the Financial Pages for Dummies®

Chapter 10. Monitoring the Market's Psychology Using Charts

In This Chapter

• Working out if charts are just a load of mumbo-jumbo or an essential investing tool

• Understanding patterns and the psychology behind them

• Introducing charts for even the biggest sceptics

If you're the sceptical type, you may prefer to skip this chapter and spare your blood pressure. At the risk of annoying a lot of very experienced and successful investors who insist that using charts is a load of superstitious nonsense, this chapter talks about the theory suggesting you can learn useful things from the shapes that price trends make when you draw them on a piece of paper – or, more probably, on your computer screen.

Fans of the charting approach have a special name for their hobby that helps to ward off the cynics. They call it technical analysis – a term suggesting some sort of scientific basis for what they do. Personally, I prefer to call this approach market psychology. I don't claim to know much about the workings of the human brain, but I can tell you that when a group of people are all in the same situation, they have a definite tendency to think in the same way. And that's where charting can help to figure out what's coming next. Sometimes, anyway.

Understanding What Charts Can Tell You and What They Can't

The last time I cricked a bone in my back, I went to my doctor for advice. She said I could fix it the official or unofficial way. The official way, she said, was to rest my back for a couple of weeks, ...