Some investors rely on chart reading (or technical analysis), when they’re aiming to add hot stock picks to their portfolios. That’s because relying on charts seems much simpler than delving into and weighing a company’s fundamentals.

We always look at charts when we select stocks to recommend in our newsletters, including Stock Pickers Digest, which focuses on more aggressive investments. And some successful investors find it helps to know a little about charts. But if you rely on charts at all, you should view them as just one of many things to consider when you make investment decisions.

Chart reading can steer you wrong at the worst possible moment

The main problem with chart reading is that it focuses too narrowly on a stock’s past price movements in an attempt to determine its future price. It’s not concerned with other crucial parts of a company’s business, such as financial statements or management. Instead, it zeroes in on how stock prices have behaved in the past, and the clues that could offer about future price movements.

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In fact, an investor who relies solely only charts might buy and sell a stock while knowing little or nothing about the underlying company.

The appeal of chart reading is that it often seems to work, at least in small ways, but this may be an illusion. You may only remember your successful chart interpretations. More important, chart reading tends to work in spurts. The risk here is that you may find it leads you to make five or even 10 small wins, then steers you wrong at the worst possible moment.

That next mistaken trade may cost you much more than your winnings to date.

Use charts to support your view of whether companies are hot stock picks

A far better approach is to look at chart reading as one tool among many. However, don’t look at the chart for a prediction of what’s going to happen. Look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If it looks like a hot stock pick, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.

If you’re looking for hot stock picks with the potential to capture 50% gains or more in less than 6 months, you should subscribe to Stock Pickers Digest. Click here to learn how you can get one month free when you subscribe today.