The Use Of Stock Market Charts As Guides & Indicators (part 1)

Many interesting queries have been received regarding the use of stock market charts. The following is a letter representative of most:

“Referring to the stock market charts explained in Magazine of Wall Street, I have found it a most valuable aid to detecting accumulation or distribution in market movements. I have been in Wall Street a number of years, and like many others have always shown a skeptical attitude toward stock market charts and other mechanical methods of forecasting trends; but after a thorough trial of the stock market charts on Union Pacific, I find that I could have made a very considerable sum if I had followed the indications shown. I note your suggestions to operators to study earnings, etc., and not to rely on stock market charts, as they are very often likely to mislead. I regret that I cannot agree with you.

You have often stated that the tape tells the story; since this is true, and stock market charts are but a copy of the tape, with indications of accumulation or distribution, as the case may be, why not follow the stock market charts entirely, and eliminate all unnecessary time devoted to study of earnings, etc?” Let us consider those portions of the above, which relate to tape reading, first clearly defining the difference between chart operations and tape reading.

The genuine chart player usually operates in one stock at a time, using as a basis the past movements of that stock and following a more or less definite code of rules. He treats the market and his stock as a machine. He uses no judgment as to market conditions, and does not consider the movements of other stocks; but he exercises great discretion as to whether he shall "play" the stock market charts signals or not.

The tape reader operates on what the tape shows now. He is not wedded to any particular issue, and, if he chooses, can work without pencil, paper or memoranda of any sort. He also has his code of rules - less clearly defined than those of the stock market charts player. So many different situations present themselves that his rules gradually become intuitive - a sort of second nature evolved by self-training and experience.

A friend to whom I have given some points in tape reading once asked if I had my rules all down so fine that I knew just which to use at certain moments. I answered him this way: “When you cross a street where the traffic is heavy, do you stop to consult a set of rules showing when to run ahead of a trolley car or when not to dodge a wagon? No. You take a look both ways and at the proper moment you walk across. Your mind may be on something else but your judgment tells you when to start and how fast to walk. That is the position of the trained tape reader”.