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Monday, September 18th, 2006

10 ways to keep your chart reading fresh

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While on a short break last weekend, I picked up Did You Spot the Gorilla? in the hotel library. Yes, it’s a cheesy self-help book, but it did have some good tips on creating the right mindset to spot opportunities.

One of the points the book made was how the human brain shifts to autopilot when we repeat things over and over. “When the world becomes too familiar, your brain reverts to autopilot and stops thinking and noticing,” the book said. “This is when opportunities can be missed. Stimulate your mind and switch to manual.”

It got me thinking about things I repeat every day: going for a walk in the morning, checking email when I get into work, walking home from the station . . . and chart reading! Technical analysis lends itself to repetition. You download your data each day and plough through hundreds of charts. If you have a system you’re trying to stick to, there is little variation.

One thing I realised is that every day for years I’ve scanned candlestick charts using the same software on the same computer. Yet when I check stocks at work on the shared Bloomberg machine it is in OHLC form because that’s what everyone else looks at. I have realised that chart patterns often look clearer and I spot more opportunities on the Bloomberg.

I think that my brain has become so accustomed to candlestick charts on my computer at home that sometimes I just shift to autopilot and therefore am in danger of missing opportunities. As an example, look at the two charts of Google below. The first is a candlestick chart and the other OHLC. Notice that while they’re similar they still give different perspectives on how the stock is acting.

The key is to stay true to your system, but at the same time keep things fresh so your brain doesn’t go stale. Here are 10 suggestions to keep your chart reading fresh:

1. Periodically switch to another chart type. There are quite a few: candlestick, line, OHLC

2. Change the time frame. If you always look at daily charts, add weekly charts every now and then. Or if you use weekly, add monthly.

3. Change the background colour of your chart package.

4. Add different colours for different moving averages. Why use blue all the time for the 50-day MA and red for the 200-day MA? Try pink or green or orange!

5. Perform your analysis somewhere else. Technical requirements permitting, try the local library, a nearby coffee shop, or another part of the house.

6. Add an indicator. You don’t have to get carried away and chop and change systems, but sometimes adding the RSI, relative strength or MACD, for example, can give a fresh perspective.

7. Shift the order of analysis. I always look at the days gainers first, and then the biggest losers. Maybe I should periodically reverse that and look at losers first

8. Change from normal linear (or arithmetic-scale) charts to logarithmic-scale charts every now and then.

9. Perform your analysis at another time of day. If you always do it after dinner when the kids have gone to bed, throw in a 5am chart reading session once a week.

10. Add another market. If you always look at stocks, try analysing a futures market. Don’t go overboard, but when you switch back to stocks you should have a fresh perspective making your analysis clearer.

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Word Count: 560. This entry was posted on Monday, September 18th, 2006 at 7:43 pm and is filed under Investing psychology, Technical analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.