Chart patterns
Encyclopedia
A chart pattern is a pattern
that is formed within a chart
when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis
. When data
is plotted there is usually a pattern which naturally occurs and repeats over a period of time. Chart patterns are used as either reversal or continuation signals.
Some people claim that by recognizing chart patterns they are able to predict future stock prices and profit by this prediction; other people respond by quoting "past performance is no guarantee of future results" and argue that chart patterns are merely illusion
s created by people's subconscious
. Certain theories of economics
hold that if there were a way to predict future stock prices and profit by it then when enough people used these techniques they would become ineffective and cease to be profitable. On the other hand, predicting what others will predict the market will do, would be valuable information.
Pattern
A pattern, from the French patron, is a type of theme of recurring events or objects, sometimes referred to as elements of a set of objects.These elements repeat in a predictable manner...
that is formed within a chart
Chart
A chart is a graphical representation of data, in which "the data is represented by symbols, such as bars in a bar chart, lines in a line chart, or slices in a pie chart"...
when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis
Technical analysis
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...
. When data
Data
The term data refers to qualitative or quantitative attributes of a variable or set of variables. Data are typically the results of measurements and can be the basis of graphs, images, or observations of a set of variables. Data are often viewed as the lowest level of abstraction from which...
is plotted there is usually a pattern which naturally occurs and repeats over a period of time. Chart patterns are used as either reversal or continuation signals.
Some people claim that by recognizing chart patterns they are able to predict future stock prices and profit by this prediction; other people respond by quoting "past performance is no guarantee of future results" and argue that chart patterns are merely illusion
Illusion
An illusion is a distortion of the senses, revealing how the brain normally organizes and interprets sensory stimulation. While illusions distort reality, they are generally shared by most people....
s created by people's subconscious
Subconscious
The term subconscious is used in many different contexts and has no single or precise definition. This greatly limits its significance as a definition-bearing concept, and in consequence the word tends to be avoided in academic and scientific settings....
. Certain theories of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
hold that if there were a way to predict future stock prices and profit by it then when enough people used these techniques they would become ineffective and cease to be profitable. On the other hand, predicting what others will predict the market will do, would be valuable information.
Patterns
Examples of "classical" chart patterns as popularized by Edwards and Magee and used widely by traders and investors include:- Head and shouldersHead and shoulders (chart pattern)The Head and Shoulders formation is one of the most well known reversal patterns.On the technical analysis chart, when a price trend is in the process of reversal either from a bullish or bearish trend, a characteristic pattern takes shape and is recognized as reversal formation.-Head and shoulders...
- Trend linesTrend lines (technical analysis)A trend line is formed when you can draw a diagonal line between two or more price pivot points. They are commonly used to judge entry and exit investment timing when trading securities. It can also be referred to a dutch line as it was first used in Holland.A trend line is a bounding line for the...
- Cup and handleCup and handleThe cup and handle formation is a bullish chart pattern that is defined by a chart where a stock drops in value, then rises back up to the original value, then drops a small amount in value, and then rises a small amount in value...
- Double top and double bottom
- Triple top and triple bottom
- Broadening topBroadening TopBroadening top is technical analysis chart pattern describing trends of stocks, commodities, currencies, and other assets.-Point of Formation:...
- Price channelsPrice channelsA price channel is a pair of parallel trend lines that form a chart pattern for a stock or commodity. Channels may be horizontal, ascending or descending. When prices pass through and stay through a trendline representing support or resistance, the trend is said to be broken and there is a...
- Wedge patternWedge patternThe wedge pattern is a commonly found pattern in the price charts of financially traded assets . The pattern is characterized by a contracting range in prices coupled with an upward trend in prices or a downward trend in prices .A wedge pattern is considered to be a temporary halt of primary trend...
- Triangle (technical analysis)Triangle (technical analysis)Triangles are a commonly found in the price charts of financially traded assets . The pattern derives its name from the fact that it is characterized by a contraction in price range and converging trendlines, thus giving it a triangular shape.Triangle Patterns can be broken down into three...
- Flag and pennant patternsFlag and pennant patternsThe flag and pennant patterns are commonly found patterns in the price charts of financially traded assets . The patterns are characterized by a clear direction of the price trend, followed by a consolidation and rangebound movement, which is then followed by a resumption of the trend.- Flag...
See also
- Market trendsMarket trendsA market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
- Trend followingTrend followingTrend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The strategy aims to work on the market trend mechanism and take benefit from both sides of the market, enjoying the profits from the ups and downs of the stock or...
- Market trendsMarket trendsA market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
- Elliot wave
- Candlestick chartCandlestick chartA candlestick chart is a style of bar-chart used primarily to describe price movements of a security, derivative, or currency over time.It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in...
- Price action tradingPrice action tradingThe concept of price action trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed, and at its most simplistic, it attempts to describe the human thought...