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

We always do some technical analysis when we look for high return investments to recommend in our newsletters, including Stock Pickers Digest, our newsletter for aggressive investing. 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.

Technical analysis: Focusing exclusively 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 could 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.

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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, 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.

Use charts to support your view of whether companies are high return 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 buy aggressive stocks, you really should have a subscription to Stock Pickers Digest. The latest issue 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 free. Click here to learn how.