Charts can help set the context

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Would you really risk your cash in volatile markets without a sense for a share's behaviour and where it stands in context of any wider trend?

As a long-term investor I am not a believer in the predictability power of charts, but quite often they can be useful to consider the probability as to where a share may head next.

When you're initially assessing a share, the chart tells you instantly whether this is a solid growth type company, how well developed its momentum may be; or a volatile cyclical or commodity type share where you need to be alert to swings in short-term sentiment.

A broadly sideways chart suggests nothing much exciting at the company, to excite investors; although sometimes useful change is coming to fruition, people have lost interest, and the share can suddenly re-rate. Both on the upside and downside, charts identify "the moment of truth" when the market realises a share is out of synch with intrinsic value.

A big slide suggests a cataclysmic event or combination of, such a "dog" share potentially being a high-risk trap for fresh money besides possibly recovery potential - so extra care is needed, assessing fundamentals. Conversely, a sudden rise - which tends to be referred to as a "spike" - is often followed by profit-taking and possibly consolidation. So be wary of buying amid public excitement.

Besides offering this vital context of where you stand in a share's wider story, charts reflect the aspect of bias in markets, you are trying to exploit - in order to hopefully buy low and sell high. You can see how firm any trend may be, where any support points may lie.

Admittedly, some shares - those most easily understood - do look as if market price reflects underlying value most of the time. At another extreme, the search for value is a wild goose chase with plenty of over-reactions that create trading opportunities. Be careful, as the more volatile the chart, generally the more speculation is involved.

So charts are useful for investment timing, especially short-term trading. Once you have a grasp for the intrinsic value of a share they can help you understand the social forces at work around it; the volatility you are trying to exploit.