Analyzing Chart Patterns: Why Charts?
  1. Analyzing Chart Patterns: Introduction
  2. Analyzing Chart Patterns: Why Charts?
  3. Analyzing Chart Patterns: Head And Shoulders
  4. Analyzing Chart Patterns: Cup And Handle
  5. Analyzing Chart Patterns: Double Top And Double Bottom
  6. Analyzing Chart Patterns: Triangles
  7. Analyzing Chart Patterns: Flags And Pennants
  8. Analyzing Chart Patterns: The Wedge
  9. Analyzing Chart Patterns: Gaps
  10. Analyzing Chart Patterns: Triple Tops And Bottoms
  11. Analyzing Chart Patterns: Round Bottoms
  12. Analyzing Chart Patterns: Conclusion

Analyzing Chart Patterns: Why Charts?


By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

Before the advent of computers and data feeds, the use of charts to formulate trading strategies was outside the mainstream of trading techniques. The reason, creating charts was difficult. Each chart had to be created by hand, with chartists adding another data point at the close of trading for each security they were following. Also, chart users were often misrepresented as a bizarre group of individuals huddled in the recesses of the brokerage house as they added the latest data point to their closely coveted charts.

But with the advancement of technology and the increased popularity of technical analysis, the use of charts has greatly increased, making them one of, if not the most important tools used by technical traders.

A single chart has the ability to display a significant amount of information. More conceptually, charts are an illustration of the struggle between buyers and sellers. While this point is debatable between the schools of investment like technical, fundamental and efficient market analysis, technical analysis assumes that: a) prices discount everything, b) prices moves in trends and c) history repeats itself.

Assuming the above tenets are true, charts can be used to formulate trading signals and can even be the only tool a trader utilizes.

Patterns on a Chart
Chart patterns signal to traders that the price of a security is likely to move in one direction or another when the pattern is complete.

There are two types of patterns in this area of technical analysis: reversal and continuation. A reversal pattern signals that a prior trend will reverse on completion of the pattern. Conversely, a continuation pattern indicates that the prior trend will continue onward upon the pattern's completion.

The difficulty in identifying chart patterns and their subsequent signals is that chart use is not an exact science. In fact, it's often viewed as more of an art than a science. While there is a general idea and components to every chart pattern, the price movement does not necessarily correspond to the pattern suggested by the chart. This should not discourage potential users of charts - once the basics of charting are understood, the quality of chart patterns can be enhanced by looking at volume and secondary indicators.

There are several concepts that need to be understood before reading about specific chart patterns. The first is a trendline, which is a line drawn on a chart to signal a level of support or resistance for the price of the security. Support trendlines are the levels at which prices have difficulty falling below. Conversely, a resistance trendline illustrates the level at which prices have a hard time going above. These trendlines can be constant price levels, such as $50, or rise or fall in the direction of the trend as time goes on.

Now that we have an understanding of the concepts behind the use of charts as a trading technique, we can start to explore the many different patterns used by chartists.

Analyzing Chart Patterns: Head And Shoulders

  1. Analyzing Chart Patterns: Introduction
  2. Analyzing Chart Patterns: Why Charts?
  3. Analyzing Chart Patterns: Head And Shoulders
  4. Analyzing Chart Patterns: Cup And Handle
  5. Analyzing Chart Patterns: Double Top And Double Bottom
  6. Analyzing Chart Patterns: Triangles
  7. Analyzing Chart Patterns: Flags And Pennants
  8. Analyzing Chart Patterns: The Wedge
  9. Analyzing Chart Patterns: Gaps
  10. Analyzing Chart Patterns: Triple Tops And Bottoms
  11. Analyzing Chart Patterns: Round Bottoms
  12. Analyzing Chart Patterns: Conclusion
RELATED TERMS
  1. Golden Cross

    A crossover involving a security's short-term moving average ...
  2. Cup and Handle

    A pattern on bar charts resembling a cup with a handle. The cup ...
  3. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  4. Markdown

    The difference between the highest current bid price among dealers ...
  5. Catalyst

    A catalyst in equity markets is a revelation or event that propels ...
  6. Confirmation

    The use of an additional indicator or indicators to substantiate ...
RELATED FAQS
  1. How do I build a profitable strategy when spotting a Rounding Bottom pattern?

    For investors looking to ride a new trend to profits, accurately identifying a reversal is the holy grail of chart analysis. ... Read Full Answer >>
  2. What is the difference between a Hanging Man and a Hammer Pattern?

    The hanging man and the hammer are both candlestick patterns that indicate trend reversal. The only difference between the ... Read Full Answer >>
  3. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  4. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  5. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  6. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center