An Introduction To Chart Patterns

For those of you who are not familiar with stock charts, you will probably not know that there are repeatable chart patterns. Those who have been in the market for a while or stumbled upon some investing websites will have come across certain names such as the double bottom, triple bottom, head and shoulders reversal pattern, ascending triangle and many many more.

In this page, let me demystify the use of chart patterns for the newbie. When you know the power behind chart patterns, you will be able to make profits day in day out by employing a few chart patterns in your trading.

Chart Patterns Show The Footprints Of Market Participants

One of the reasons why traders study charts is to figure out what the different market participants are doing. Just like a doctor that looks at the graph of a patient's heart can determine the health of the patient, so the trader who study chart patterns will be able to know the health of a stock or market.

Chart patterns are formed by the collective actions of different market participants. They can range from Wall Street pros, the fund manager, the hedge fund manager, big traders, hedgers and to main street where self directed investors and the public resides.

The collective action of buying and selling is reflected in stock charts. Together they help to create a chart pattern. Since the emotion of greed and fear is every present in the market, they tend to repeat itself again and again. That is why certain patterns like the double bottom or double top is ever present in a stock chart from 100 years ago to today.

Chart Patterns Repeats Itself Again And Again In History

The previous paragraph already stated that chart patterns repeats itself again and again in history. If you take a study of stock charts from the 1900s and the 1950s and the 2000s, you will often see many similarities. One of the most evident and clear chart patterns that are present is the 4 stock market stages that every stock or index will go through.

The process of bottoming, the uptrend, the market top and then the decline repeats itself over and over again. All kinds of patterns are derivative and will appear regularly in each stage of the market. Therefore, it pays to study chart patterns. If something repeats itself again and again, it really is worth it to study the patterns.

Familiarity with as many stock chart patterns will enable a trader to be able to spot it in advance and profit from it.

an introduction to chart patterns

The chart above shows the ETF for the S&P 500 index, the SPY. SPY is a short form of the S&P 500 Depository Receipts. It is not some fictional character like James Bond. It is used by traders to trade the S&P 500 index without using a futures account. Over the years, it has gained such popularity that the trading volume can be more than 100 Million in a single day. Therefore, it is a viable day trading or swing trading vehicle for many traders.

Chart Patterns Show Reversals And Continuations

One of the biggest benefits of studying chart patterns is that they can often tell us with very good accuracy the probability of the stock continuing higher or about to start a reversal. With enough study, a good trader or investor can often spot the beginnings of a nice bull run or the beginnings of a big bear market in the stock.

Chart patterns can be divided into:

  • Bullish continuation patterns
  • Bearish continuation patterns
  • Bullish reversal patterns
  • Bearish reversal patterns

We won't go into every single pattern on this page since it is an introduction, but let me show you some of the bullish continuation pattern which you can learn from the Stock Market Course on this website.

Examples of Bullish Continuation Patterns:

Any single one of them is a sign that the stock is going to go higher. Some of them are classics such as the flag or pennant and some of them are from my own observations and some I learn it from other traders. I think if you stare at charts for a long period of time and spend hours and hours doing your own research, you will also come up with a list of your own Bullish Continuation Patterns.

You certainly do not need to know everything. What you need to do is to have a few chart patterns that you study really well. Then you will be able to take advantage of the knowledge and craft a trading strategy that gives you an edge.

p.s. you will see there are a few links on the list. I'm still in the process of completing this website. As I find time to write more and more, I will update the list to include more links to finished pages.

Chart Patterns Are Trading Setups For Traders

If chart patterns can be very good to spot continuation and reversals in stocks, they can be used as trading strategies or setups for traders. The reason why they can be strategies that bring profit to traders is because chart patterns repeat itself again and again. Some have an accuracy of 70% and above.

Some patterns also offer good risk rewards and some patterns like the Bullish Continuation Patterns and the Bearish Continuation Patterns are actually following the trend. The trend is your friend as they say in Wall Street. Therefore, a trader who learns and master a few continuation patterns will be trading with the trend. Eventually, it will give them an edge over other traders.

consolidation at 20 ma bullish continuation chart pattern

The chart of AABA above (formely Yahoo) had a nice consolidation at 20 MA bullish continuation chart pattern. See how the stock trended higher after the chart pattern appeared. Traders who were familiar with the chart pattern will be able to take advantage of this chart pattern and make a trade from it.

Discover more: 7 Reasons Why Trend Trading Beats All Other Trading Strategies

the break downtrendline at 50 MA support continuation chart pattern

The chart above is the chart of ADBE which gave traders a bullish break downtrendline at 50 MA continuation pattern setup. The setup provided traders with a nice swing trade that lasted for 2 weeks.

Conclusion

As you journey through Dstockmarket's Stock Market Course, you will come across many many reliable time tested patterns that repeats itself again and again. Trading is not about random selection of a stock that looks great or sound great. It is selecting stocks that forms chart patterns that repeat itself again and again in history. With an edge, you can certainly come out on top and be a better trader.

Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com

Charts with the investing.com logo are courtesy of Investing.com powered by Trading View

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