The ability to analyze a stock chart is essential to trading stocks whether you take a technical or fundamental approach. The chart shows us what all market participants know about a stock.

Most market beating stocks start their strong trends with abnormal price behavior. However, not all abnormal price behavior leads to a market beating trend. The key qualifier of abnormal price action is the stock chart. We can do well if we focus on the stocks trading abnormally out of predictive chart patterns.

To read any chart, you need to be able to see and understand the following:

Resistance - a ceiling price on the chart, drawn across the price tops. This price level represents the maximum that investors were willing to pay for the company fundamentals in the past. A break through a price ceiling implies positive fundamental change in the company's business.

Support - a floor price on the chart, drawn across the price lows. This represents the minimum that the sellers were willing to take for the company fundamentals in the past. A break down through support implies negative fundamental change.

Optimism - when the buyers are in control of the market, the bottoms will be rising from left to right. This is a sign of optimism.

Pessimism - when the sellers are in control of the market, the tops will be falling from left to right. This is a sign of pessimism.

Price volatility - the wider the range between support and resistance, the more volatile the stock is and therefore, the more uncertain investors are about what the company is worth. When a stock is trading in a sideways, narrow range, investors have confidence that the price of the stock is a valid representation of the company fundamentals.

Abnormal Activity - abnormal breaks from low price volatility imply new fundamentals that may not be widely known. A breakout through resistance, from optimism, from low price volatility is a good signal to buy.

You can learn more about these chart reading principles in the Stockscores Foundation lesson, „The Six Elements of Chart Patterns” found in the Stockscores Education Center.

Whether you are a short term active trader considering intraday charts or a long term investor taking trade signals off of a weekly chart, these six characteristics of chart pattern reading are essential to picking winning stocks.

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