5 Most Common Chart Patterns in Technical Analysis

>> Dec 4, 2018



Technical analysis is a great way to find successful short-term trades if you know how to read the charts. Several patterns are notable for a variety of reasons and learning these charts can help you become a better day trader.
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Head and Shoulders
The head and shoulders trading pattern are the most common trading pattern that day traders look for when analyzing the charts. The success rate for both the top and inverted models is around 75%. The chart itself signifies a reversal in the stock's trend.The top pattern indicates a downward pull, while the inverted chart could signify a price rally.

Cup and Handle
The cup and handle pattern tend to be bullish and results in price rallies. The pattern will see a drop in price and a slow rise to the original value. Another smaller drop follows, and usually, a price rally follows.A true cup and handle pattern would have a more rounded bottom, and prices at the top of both formations should be around the same. Trade volume fluctuates during the formation of the cup but will increase rapidly near the end of a handle.An inverted cup and handle can be seen when a sharp price drop emerges.

Double Bottom
A double top chart usually appears at the end of a bull market. Two distinct peaks in stock price will reach around the same level before a steep drop in price. The space between two double peaks is called the valley, which forms the neckline for confirming the pattern.Watching a double top or double bottom also means paying close attention to the volume of the stock.  Increased volume should create the first price peak followed by low volume for the valley. The second price rally should have lower volume than the first.

Flags and Pennants
A flag and pennant pattern for a stock is a signal that the current trend will continue. These are some of the most used patterns in technical analysis for that reason.The pattern creates what is known as a wedge and indicates that the market is currently gathering momentum. Active movement in the bullish or bearish direction is signaling that it will continue in that direction.Traders who enter a flag and pennant trade perpetuate the pattern by taking profits and taking positions as their goals are hit.

Benefits of Technical Analysis
One of the major benefits of technical stock analysis is using historical price action to predict the direction a stock will go. Spotting these familiar patterns in analyzing old data will become second nature to you the more you study the charts.Keep in mind that technical analysis will not help you reach a 100% sure decision when investing. You should always diversify your holdings and use technical analysis with a proper risk/reward ratio. Approach it like making small if/this statements like, "if this stock hits $25 there's a strong chance it could go as high as $30."You should always have an exit plan built-in to your position. If the stock doesn't reach your expected targets, have a price in mind that lets you take profits or reduce loss.

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