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.
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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