Understanding Stock Charts: What They Show and What They Don't
Charts show history, not the future. Here's how to read them without fooling yourself.
Understanding Stock Charts: What They Show and What They Don’t
Key Takeaways
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Charts are useful for perspective, not prediction. Long-term trends, past recoveries, and comparisons to benchmarks give you context. Daily patterns and visual trends don’t predict the future, no matter how tempting it feels.
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The technical analysis trap is real. Pattern hunting, trend lines, and intraday obsession feel like you’re finding signals. You’re not. You’re finding patterns in noise. This is confirmation bias dressed up as analysis.
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Focus on what actually matters: total return. Price plus dividends is what you earned. That’s the number that counts. Everything else on a chart is context for understanding history, not a crystal ball for the future.
What a Stock Chart Actually Shows
A stock chart displays price history over time. You’ve got the price axis running vertically, time running horizontally. Candlesticks show where the stock opened, closed, and how high and low it traded during the period. Volume bars underneath show trading activity.
That’s it. That’s the information. It’s straightforward. A chart is a record of what happened.
Where people go wrong is treating a chart like a predictor of what will happen. You look at a price pattern and think “When this happens, that follows.” You’re not alone in this. Millions of people do it. And most of them lose money.
Charts are genuinely useful for some things. They’re terrible for others. Knowing the difference matters.
What Charts Are Actually Good For
A long-term trend gives you perspective. Looking at a stock or index over 5 to 10 years shows you the real trajectory. You can see if something’s fundamentally changed or if you’re looking at a temporary dip. A company that’s been growing for a decade and had one bad quarter looks different when you zoom out. That zoom-out is valuable.
Historical crashes tell you something important. Did this stock or index crash in 2008? In 2020? And then what happened? It recovered. That’s useful context. You see that crashes aren’t permanent. Markets always recover eventually. That knowledge matters when you’re in the middle of a crash and feeling panicked.
Comparison to an index or benchmark shows you how an investment is actually performing relative to alternatives. If you own a stock that’s up 20% but the index is up 40%, you’ve actually underperformed. A chart makes that clear. Or maybe your stock is down 5% but the index is down 20%. Then you’ve done well relative to the market. Context matters.
Dividend adjustment is important if you’re looking at how much you actually earned. A stock that dropped 10% but paid 5% in dividends is down 5% in total return. Charts that adjust for dividends show the real picture.
Log charts are useful for very long-term comparisons. They compress decades of data into something readable and show growth rates rather than absolute prices. A stock that went from €1 to €100 looks the same growth-wise as one that went from €100 to €10,000 on a log chart. That’s perspective.
All of these uses have something in common: they’re looking backward. They’re asking “What happened?” Charts are excellent for that question.
What Charts Should NOT Tempt You To Do
Pattern hunting is the first trap. You see a shape that looks like a “head and shoulders” or a “double bottom” and think it predicts price movement. These patterns are famous in trading circles. They feel like they work. They don’t. What’s happening is pure confirmation bias. When a pattern “works,” you remember it. When it fails, you forget or rationalize it. The human brain is designed to find patterns. Sometimes those patterns are real. Usually they’re not.
If patterns actually worked, professional traders with millions of dollars and advanced computers would have arbitraged away all the profits by now. They haven’t. That’s because the patterns aren’t predictive. They’re just shapes that emerged from random price movements.
Trend lines look scientific. You draw a line through a series of high or low points and assume the price will bounce off it. This is confirmation bias in visual form. You’re subconsciously choosing which points to include in your line based on what supports your thesis. You’re ignoring points that don’t fit. You’re then shocked when the price violates your line because your brain selectively showed you evidence that supported the line.
Hourly or daily obsession with charts is corrosive. If you watch a stock every hour, you see noise. You see random fluctuations. Your brain tries to find meaning in that noise. It doesn’t exist. Zoom out to weekly or monthly, and the noise disappears. But if you’re checking hourly, you’re going to feel like you need to do something. That feeling is usually expensive.
Trading on charts is how people lose money systematically. They see a “signal” and buy or sell. The signal wasn’t real. They lose. They try again with a different pattern. Lose again. Eventually they blame the market or “bad luck.” The actual problem is they were trying to predict the unpredictable.
Total Return Is What Matters
When you’re looking at a chart and thinking about whether an investment has done well, remember what actually matters: total return.
Total return is price gain plus dividends. If you bought a stock at €50, it’s now worth €55, and it paid €3 in dividends, your total return is €8 on €50, which is 16%. The chart might show a €5 gain. The real gain is €8.
This matters because it’s the actual number that tells you whether you’ve made money. A stock that seems flat on a chart because the price hasn’t moved much might have paid healthy dividends. The total return is what counts.
Dividend-adjusted charts show this directly. Your broker can probably show you total return calculations. Use them. They’re more accurate than trying to mentally add dividends to price movement.
The Practical Approach
Use charts to understand context and history. Look at 5-year and 10-year charts to see the real trajectory. Look at how an investment performed during crashes to understand its stability.
Don’t use charts to predict the future or time your buys and sells. The success rate is too low and the risk is too high.
If you find yourself staring at hourly or daily charts, stop. You’re in the danger zone. That frequency of price movement is noise. You’re not gathering information that helps you make better decisions. You’re gathering anxiety.
If you’re using Gallio or a similar tool, you’ve already solved this problem. You have your targets set. You get monthly briefings. You’re not constantly checking. You’re not pattern hunting. You’re just monitoring progress against your actual goals.
Remember that a chart is a history book, not a fortune teller. It’s telling you what happened. It’s not telling you what will happen. Treat it that way and you’ll make better decisions.
Gallio keeps you focused on your goals instead of chart patterns. Track your progress toward what actually matters, not the daily noise that tempts you to overtrade.
Understanding Stock Charts: What They Show and What They Don’t
Key Takeaways
-
Charts are useful for perspective, not prediction. Long-term trends, past recoveries, and comparisons to benchmarks give you context. Daily patterns and visual trends don’t predict the future, no matter how tempting it feels.
-
The technical analysis trap is real. Pattern hunting, trend lines, and intraday obsession feel like you’re finding signals. You’re not. You’re finding patterns in noise. This is confirmation bias dressed up as analysis.
-
Focus on what actually matters: total return. Price plus dividends is what you earned. That’s the number that counts. Everything else on a chart is context for understanding history, not a crystal ball for the future.
What a Stock Chart Actually Shows
A stock chart displays price history over time. You’ve got the price axis running vertically, time running horizontally. Candlesticks show where the stock opened, closed, and how high and low it traded during the period. Volume bars underneath show trading activity.
That’s it. That’s the information. It’s straightforward. A chart is a record of what happened.
Where people go wrong is treating a chart like a predictor of what will happen. You look at a price pattern and think “When this happens, that follows.” You’re not alone in this. Millions of people do it. And most of them lose money.
Charts are genuinely useful for some things. They’re terrible for others. Knowing the difference matters.
What Charts Are Actually Good For
A long-term trend gives you perspective. Looking at a stock or index over 5 to 10 years shows you the real trajectory. You can see if something’s fundamentally changed or if you’re looking at a temporary dip. A company that’s been growing for a decade and had one bad quarter looks different when you zoom out. That zoom-out is valuable.
Historical crashes tell you something important. Did this stock or index crash in 2008? In 2020? And then what happened? It recovered. That’s useful context. You see that crashes aren’t permanent. Markets always recover eventually. That knowledge matters when you’re in the middle of a crash and feeling panicked.
Comparison to an index or benchmark shows you how an investment is actually performing relative to alternatives. If you own a stock that’s up 20% but the index is up 40%, you’ve actually underperformed. A chart makes that clear. Or maybe your stock is down 5% but the index is down 20%. Then you’ve done well relative to the market. Context matters.
Dividend adjustment is important if you’re looking at how much you actually earned. A stock that dropped 10% but paid 5% in dividends is down 5% in total return. Charts that adjust for dividends show the real picture.
Log charts are useful for very long-term comparisons. They compress decades of data into something readable and show growth rates rather than absolute prices. A stock that went from €1 to €100 looks the same growth-wise as one that went from €100 to €10,000 on a log chart. That’s perspective.
All of these uses have something in common: they’re looking backward. They’re asking “What happened?” Charts are excellent for that question.
What Charts Should NOT Tempt You To Do
Pattern hunting is the first trap. You see a shape that looks like a “head and shoulders” or a “double bottom” and think it predicts price movement. These patterns are famous in trading circles. They feel like they work. They don’t. What’s happening is pure confirmation bias. When a pattern “works,” you remember it. When it fails, you forget or rationalize it. The human brain is designed to find patterns. Sometimes those patterns are real. Usually they’re not.
If patterns actually worked, professional traders with millions of dollars and advanced computers would have arbitraged away all the profits by now. They haven’t. That’s because the patterns aren’t predictive. They’re just shapes that emerged from random price movements.
Trend lines look scientific. You draw a line through a series of high or low points and assume the price will bounce off it. This is confirmation bias in visual form. You’re subconsciously choosing which points to include in your line based on what supports your thesis. You’re ignoring points that don’t fit. You’re then shocked when the price violates your line because your brain selectively showed you evidence that supported the line.
Hourly or daily obsession with charts is corrosive. If you watch a stock every hour, you see noise. You see random fluctuations. Your brain tries to find meaning in that noise. It doesn’t exist. Zoom out to weekly or monthly, and the noise disappears. But if you’re checking hourly, you’re going to feel like you need to do something. That feeling is usually expensive.
Trading on charts is how people lose money systematically. They see a “signal” and buy or sell. The signal wasn’t real. They lose. They try again with a different pattern. Lose again. Eventually they blame the market or “bad luck.” The actual problem is they were trying to predict the unpredictable.
Total Return Is What Matters
When you’re looking at a chart and thinking about whether an investment has done well, remember what actually matters: total return.
Total return is price gain plus dividends. If you bought a stock at €50, it’s now worth €55, and it paid €3 in dividends, your total return is €8 on €50, which is 16%. The chart might show a €5 gain. The real gain is €8.
This matters because it’s the actual number that tells you whether you’ve made money. A stock that seems flat on a chart because the price hasn’t moved much might have paid healthy dividends. The total return is what counts.
Dividend-adjusted charts show this directly. Your broker can probably show you total return calculations. Use them. They’re more accurate than trying to mentally add dividends to price movement.
The Practical Approach
Use charts to understand context and history. Look at 5-year and 10-year charts to see the real trajectory. Look at how an investment performed during crashes to understand its stability.
Don’t use charts to predict the future or time your buys and sells. The success rate is too low and the risk is too high.
If you find yourself staring at hourly or daily charts, stop. You’re in the danger zone. That frequency of price movement is noise. You’re not gathering information that helps you make better decisions. You’re gathering anxiety.
If you’re using Gallio or a similar tool, you’ve already solved this problem. You have your targets set. You get monthly briefings. You’re not constantly checking. You’re not pattern hunting. You’re just monitoring progress against your actual goals.
Remember that a chart is a history book, not a fortune teller. It’s telling you what happened. It’s not telling you what will happen. Treat it that way and you’ll make better decisions.
Gallio keeps you focused on your goals instead of chart patterns. Track your progress toward what actually matters, not the daily noise that tempts you to overtrade.