Investing is like a voyage into the unknown: no-one can say with certainty how a stock or sector will fare in the future. Professionals who identify the performers of the future are rewarded handsomely with company bonuses and performance fees that eat into investors’ returns. They use all manner of techniques to pick stocks: pouring through screeds of company accounts, analysing cash flow and business plans to determine how these firms will fare.

Some ordinary investors, though, are making money purely from charting share price past performance rather than developing any real knowledge of the businesses involved.

While some chartists work out their own algorithms to analyse patterns — this requires a strong maths ability — most download software free from the internet, then subscribe to updates (for about £200-£1,000 a year).

Carole Howorth, at Lancaster University Management School, studied 20 chartists, a dozen of them in-depth.

Albert (Howorth only uses Chritian names — some of her subjects are eminent City analysts) uses “black-boxing”, a systematised method that requires little or no interpretative activity. Chartists in this group don’t commit significant resources to developing their skills, but rely on the basic analysis of others.

While fellow black-boxer Nigel uses “relative strength index”, a mainstream technical indicator available on virtually every technical analysis software package, Albert simply subscribes to a newsletter, then watches the recommended shares on a basic end-of-day charting programme.

“If the graph is going like the north face of the Eiger, I may well buy and I’ll hold those until they drop; I only buy shares when they’re going up,” says the busy family man, who rates it his best method in 15 years of investing.

Then there are number-crunchers. These chartists use a range of devices from looking at simple share price moving averages to “Ichimoku”, a Japanese technique that draws a cloud beneath or above a stock chart, designed to help investors spot trends.

“The charts will tell me what I need to know and if it looks interesting, either because it’s going up or going down, whether it’s worth investigating further,” says number-crunching Tony.

Mickey is a wave-surfer. He uses Fibonacci, an automated method that, simply put, searches for patterns of price movements. “It’s dead easy,” he says. “I select Fibonacci, click once on a high point, once on the low point and the lines are automatically drawn.”

Max, by comparison, is a relative beginner with less than a year’s trading experience. Frustrated that his losers outnumbered winners, he turned to chart-seeing. He scans a universe of 200 stocks, limited by his chosen specialism of US equities, to decipher trends.

So, how did they do? Five of the 12 studied at length had a high success rate, beating the market over a year, says Howorth’s study, to be published in the Accounting, Organisations and Society journal. Four matched the market and three underperformed.

There were no clear delineations. In the high camp were Albert and two other black-boxers, number-cruncher Tony and a wave-surfer. Chart-seeing Max and one from each of the other three categories had medium performance. Wave-surfer Mickey, a black-boxer and a number-cruncher had low success. Clearly this, like the techniques of the professionals who often deride charting as “voodoo finance”, is not an exact science.

Jennifer Hill is deputy editor of the Money section

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