This module introduces another important topic of technical analysis, which is Chart Patterns. These are the distinctive pattern formations created by the movements of security prices on a chart over a period of time. While analyzing price charts, these distinctive patterns help to predict future price movements of any financial security. So, let us start this module and first understand the concepts of chart patterns.
What are Chart Patterns?
Price Patterns are pictures or formations, which appear on price charts which can be classified into different categories, and have a predictive value.
When the prices are not trending, they are said to be moving sideways. These sideway movements many a times conceive major moves. The sideways moves have the potential to deliver a major change in trend; Patterns are formed in the period of transition from sideways to trending markets. It puts all buying and selling that’s happening in the stock market into a concise picture. It provides a complete pictorial record of all trading, and also provides a framework for analyzing the battle between bulls and bears.
Chart pattern analysis can be used tomake short-term as well as long-term forecasts. The data used by the chart patterns can be intraday, daily, weekly, monthly or yearly.
Why is it Important to analyze the Chart Patterns?
Chart patterns are a great way of viewing price actions which occur during the stock trading period. They tend to repeat themselves over and over again which helps to appeal to human psychology and trader psychology in particular. If you are able to learn and recognize these patterns early, they will help you to gain a real competitive advantage in the markets.
Just as volume, support and resistance levels, RSI, and Fibonacci Retracements and other technical indicators, stock chart patterns help in identifying trend reversals and continuations. We will discuss the different types of chart patterns in the next section of this module.