Free stock software downloads and resources

What are the basics of stock reading? Stock charts are plots of stock price versus time. They prices are often shown on a logarithmic scale.

This is a tutorial about the basics of graphs which will help for stock reading.

At an intuitive level, the important point to understand is that when the graph is rising, the price is getting higher with time. That's good if you own shares of a stock. If it's falling, it means that the price is getting lower with time. This is not good if you own this stock. If it's rising just a little bit, don't be too dismayed. Just a 15% rise in the price of a stock in a year, is a pretty darned good rate of return.

There are many people out there that think that you can tell a lot by reading the ups and downs of a stock. The general name for this kind of thing is "Technical analysis". The idea is that identifying certain patterns will tell you the future direction of a stock. This idea is largely discounted by serious academic researchers. There are very good arguments against the idea you can do this sort of thing at anything better than chance.

The problem is a basic one of human intelligence. Humans are very good are seeing patterns in things, and this has allowed us to survive dangerous situations, find food, and get darned good at all sorts of artificial things, like math or playing chess. The downside is that we will often see a few chance occurrences of events that seem to occur together, but which may not be related to each other at all, and think that there is a some causal connection between them.

For example, you might find that, quite frequently, when you eat an apple you get a cold. Is this really the case? Probably not. What's happening is that your enormous brain is looking for patterns of activity that cause the cold, and you consider all your eating habits, not just eating apples, but pears, bananas, pizza, chili, potatoes, etc. Given a huge list of foods, you'll focus in on the one that seems to correlate best with getting a cold. With a large enough data set, you will find that one kind of food correlates the best, and the correlation could be pretty good, though it's almost certainly due to chance.

Same with patterns in the market. With gigabytes of data, of course they'll be certain patterns that, by chance, appear to predict future price. However these patterns actually don't do anything. A lot of scientific research has backed up this point, so either you're smarter than all these Ph.D.'s that study this stuff for a living, or you're just seeing pattern that doesn't mean anything.

So for the basics of stock reading, the important point to keep in mind is that stock patterns are random, but just as a child easily sees elephants in the clouds, they aren't really there.