Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “The best way to use technical analysis to find winning stocks”

Some investors rely on technical analysis (or chart reading) when they’re picking stocks. That’s because relying on charts seems much simpler than delving into and weighing a company’s fundamentals.

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.

How Successful Investors Get RICH Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor. How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Zeroing in on share prices will eventually cost you money

The main problem with technical analysis 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, technical analysis zeroes in on how stock prices have behaved in the past, and the clues that may offer about future price movements.

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 technical analysis 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, technical analysis 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.

Our investment advice? Use technical analysis to support—not determine—your view of whether companies are good investments. 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 a company looks promising, 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 stocks with the potential for gains of 50% or more in 6 months or less, you should subscribe to Stock Pickers Digest.

The latest issue of Stock Pickers Digest gives you our full analysis, including clear buy/sell/hold advice, on 19 stocks that may be suitable for the part of your portfolio you devote to aggressive investing. What’s more, you can get this issue ABSOLUTELY FREE. Click here to learn how.