In my opinion, mastering the art of reading stock charts is essential to making money buying and selling stocks. Let’s take a look at one of the most important features of stock charts:

Trend Identification – Often, with a very quick glance, one can identify whether a stock is trending up, down, or not at all. Just by looking at the price movement of a stock, one can easily see if there are higher highs and lows for a bullish stock. And the opposite would be true for stocks trending down.

moving averages – Another good way to discover the trend of a stock is to use a moving average of 20, 50 and 200 days. To do this, select the moving average option when configuring your software. Again, you can easily see if the moving average lines are trending up or down and if there are crossovers.

moving average crossovers – A crossover occurs when one of the moving average lines crosses the other. For example, around January 2008, the DJIA 50-day moving average crossed the 200-day moving average lower. Over the next 10 weeks or so, the DJIA trended lower before starting to move higher.

There can be many crossovers depending on the time frame you are looking at, as well as the number of days you select. A 200-day moving average will look more stable, while the 20-day moving average can go up and down. It’s easy to get “whacked” if you’re a long-term investor but are focused on short-term moving averages.

Therefore, longer-term investors do not want to buy and sell every time the 20-day moving average crosses the 50-day moving average.

However, many investors base their buy, sell, and hold strategies on multiple crosses, or no crossovers. Often several moving averages will “bounce” or “touch” another moving average. But it is important that the moving average crosses before it triggers a buy or sell action.

Timing your purchases and sales – If you own shares in a stock that is trending down, this may be a very good time to sell it and move on. However, depending on your time horizon, you may want to increase your holding as the share price declines. Of course, you are still hoping to buy a stock that goes up, or eventually will.

If you notice that a stock is trending higher, this may be the perfect time to jump on board and buy some shares. The earlier you buy it in an uptrend, the more money you will make when you sell it.

It’s generally not a good idea to “bottom fish” unless you have the capital and emotional stamina if you see the stock price drop further. Many investors never buy stocks that are down; if they really want it, they wait until there is a “definitive” uptrend.