The New Science Behind Stock Charts

Behavioral finance research explains the value of plotting stocks visually.

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1. Start with a fundamental look at the company based on its earnings and dividend potential. "Don't start by looking at charts," Littlejohn says.

2. Use the same metrics consistently. The process of charting stocks aims to provide consistent benchmarks and measurements that remove emotion and replace it with specific buy and sell targets.

3. Watch moving averages. This is the basic concept of charting. When a stock moves out of its trading range, it suggests movement, up or down.

4. Question your emotions. "Most of the time when you base a decision on emotions, you will be wrong," Littlejohn says.

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He reaffirms the first point: Don't get carried away with charts. "Before you even start doing that, evaluate the fundamentals because they are what supports everything. Otherwise, you are just running with the lemmings," he says.

Technical analyst Roth puts less stock in those fundamentals, and still argues that emotions will always trump "information-based" decisions. After working for nearly 50 years on Wall Street at firms such as Morgan Stanley and Miller Tabak, Roth has dealt with his share of skeptics. Now in retirement, but still an active market-watcher, he feels vindicated by the work of behavioral scientists. "It's a huge confirmation from academia when they say there is information in those chart patterns," he says. "We've known it for 100 years. We called it market psychology. Now it's behavioral finance."