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Chart patterns – an introduction

When you begin trading in financial markets, there are a lot of important elements to grasp. Learning trading strategies will take time, but you can stay ahead of the game. Comprehending how to read chart patterns is a good start. Here is a quick breakdown of essential chart patterns for beginners to get you started.

  • Why use the charts for trading
  • Analysing chart patterns
  • Reversal patterns
  • Continuation patterns

Steve Miley

pro MEMBER SINCE 2018

Steve has 29 years of financial market experience including 3 years at Credit Suisse and 15 years at Merril Lynch. Steve is the Academic Dean for The London School of Wealth Management and has won many awards from Technical Analyst Magazine.

10 min read 27th of Dec, 2018
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Chart reading for beginners – why use the charts for trading?

When first looking at charts as a trader or investor, you will have a lot of questions. To begin with, you will want to learn just what a chart is and what it shows. You will also want to know the best techniques to learn in order to understand, read and analyse these stock charts explained. Most importantly, you will probably be curious about the impact they could have on you and on your investing and trading. Charts give you a lot of detailed information in a concise manner that as a trader you can interpret to your advantage.

With some basic guidance and understanding, you will be able to analyse most chart patterns and use them to trade and invest effectively. Typically, charts tell you a story of the performance of a market over a period of time. Once you learn to interpret the price and volume numbers in the charts, you will be able to understand the “story” of the chart. That information is all you need to make well-informed predictions about the financial markets and asset classes that you are looking to trade and/ or invest in.

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Analysing chart patterns

Traders use chart patterns to make trading decisions, which is usually described as technical analysis, whereby charts are the key determinant in forecasting the price of a market. Price charts are visual and considered to be relatively easy to comprehend and are an essential part of technical analysis. The chart pattern and where the pattern occurs within a certain trend can indicate where the next price move could be.

There are typically two types of chart patterns –reversal patterns and continuation patterns. Reversal patterns indicate that the trend maybe be ending, whereas a continuation pattern indicates that the trend is likely to continue.

Chart patterns

Types of chart patterns

Reversal Patterns

Head and Shoulders: This is a reversal chart pattern that indicates a prior chart trend is either reversing or has already reversed. The Head and Shoulders Top indicates to the traders that an upward trend is over, implying that the price is heading for a decline.

The Head and Shoulders Bottom or Inverse Head and Shoulders pattern indicates the end to a down trend and that price will likely go up.

Double Tops and Double Bottoms: The Double Tops and Double Bottoms are reversal chart patterns. The Double Top indicates that the price is no longer continuing on its upward trend and that lower prices are forthcoming. The Double Bottoms indicates a vice versa trend.

The Double Tops are formed when the price makes a high within an upward trend and pulls back. This is followed by another price peak and the price falling below the previous pullback low. With two price peaks, the pattern is referred to as a Double Top.

The Double Bottom follows a similar pattern as above, except that the price posts two lows near to the same level within the same downward trend, then break above the high in between the two lows.

Continuation Patterns

Triangles: While the Triangle chart pattern can be a reversal pattern too, it is most likely to indicate a continuation chart pattern. The Triangle pattern forms when the price movement narrows down due to several price SWING converging together. This creates the appearance of a triangle.

Flags and Pennants: Flags and Pennants indicate a continuation chart pattern. The terms flag and pennant are often used interchangeably. This pattern is formed when the price either advances or declines strongly and then moves sideways or downward slightly, then continues its strong advance or decline

Types of chart patterns

 

 

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Conclusion:

Conclusion

When looking at chart patterns, there is often confusion among new traders as to which charts they should use – weekly charts, daily charts or even intraday charts. The investor or trader should chode the time frame that vest reflects their trading strategy and their trading style. A longer-term trader or investor would typically look at weekly and daily charts to analyse chart patterns. However, a shorter-term traders, maybe only looking to hold a position for a few days, or maybe even a few hours, would look to analyse and spot charts patterns on intraday charts, maybe 4 hours, 1 hours or even sub one hour charts.

Traders use charts as part of their trading strategy to determine the price direction on an asset as well as to analyse the potential price rise or decline on that particular stock. Different chart patterns help to analyse and predict d, both the directional risks for a market and also to identify the entry points for the buying or selling, target levels to take profits and also exit levels to cut losing trades. and provide critical information on stop loss levels and profit estimates. As such, stock chart patterns for beginners offer a complete strategy for trading. In addition to doing basic research, broker comparisons, and gaining experience, many beginner traders like to incorporate chart patterns into their trading plan.

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