Introduction to Chart Patterns
Chart patterns are essentially nothing more than organized stock price behavior that is displayed visually on a stock chart. These chart patterns basically show the relationship between the supply and demand for a company's stock. While a stock chart will at first glance seem to display a large amount of random price behavior, closer examination will reveal a variety of organized stock price behavior.
There are numerous chart patterns, some of which are quite obscure and only occur occasionally, while others are easily recognized and occur more frequently.
The astute stock investor looking for these chart patterns on a stock chart can make an informed decision about a proposed investment, such as whether a short-term trade would be more appropriate compared to a long-term investment or whether it is appropriate to add to an existing position or even reduce an existing position.
Chart patterns are popular with investors who time their entry. They also provide a convenient method of locating proposed short-term trades, as trades taken from chart patterns generally provide a more reliable outcome than merely randomly entering a trade.
Trading from chart patterns is a popular
strategy with stocks traders
Some chart patterns are used to determine the extent and direction of a major movement in price while other chart patterns are used to determine when a major movement in price has ended. The chart patterns that are easily recognized and occur more frequently are the most useful patterns for stock investors and traders.
The use of chart patterns provides a visual conformation of the trending nature of a stock. The primary reason for using chart patterns is to trade with a trending stock rather than trading a stock that is merely randomly fluctuating about. The popular phrase "The trend is your friend" is the basis for chart pattern trading.
Too many beginner stock investors and would be traders approach short-term investing with nothing more than hope and ambition. They have no systematic approach and will typically sell a profitable position prematurely and hold on to a losing position in the hope that it will trade back up to their purchase price so that they can sell it and at least get their money back. Needless to say that such an approach will do nothing but lose money and will cause a significant amount of emotional distress.
Chart patterns provide short-term investors and traders with a systematic approach which can be used that at least provides a rational basis for selecting when to enter a trade and when to exit.
Chart patterns are normally drawn on daily bar charts, but they can also be drawn on line charts and candlestick charts. The chart patterns can also be seen on weekly and even on monthly charts which provides a very long-term view.
The chart patterns that will be covered are the patterns that occur more frequently and are reasonably easy to see on a stock chart. For those investors and traders who are new to chart patterns, it is easier to view the pattern when lines are drawn on the chart to highlight the pattern. Once the beginner gains experience, the drawn lines can be omitted.
Stock Analysis for Finance Students and Investors