The volatile nature of markets makes it difficult to provide accurate forecasts. However, there are certain patterns which will, if read correctly indicate in which way the market is going to move.
Learning to read stock chart patterns will thus give you an edge when trading. Luckily, there is information online that will give you an insight into the most common stock chart patterns and how you should utilise them to your benefit.
By using DailyFX forex trading patterns guide for instance, it is possible to test yourself on your pattern knowledge as well as to learn about the 12 most common foreign exchange patterns. In its very nature, analysing chart patterns as described here, consists of analysing a set of pre-defined patterns which are in turn formed by moving market prices.
The aim of recognising as well as analysing the patterns is to identify potential entry and exit points. Both analysts and traders agree that having knowledge about different stock chart patterns definitely creates a powerful addition to any market trading strategy. Here the 5 most common stock chart patterns will be mentioned in order to provide an overview of the segment.
Double top chart pattern
This pattern indicates that an upward trend in the market may be losing momentum. Usually this occurs when a particular stock hits a price level but then meets resistance and declines. Then, when the price moves back up again, but fails to break the previous high, a double top patterns is formed. For a complete pattern, the price needs to fall back down, break the previous low, thus signalling a weakness in the market. Here the target is the “height” of the pattern, projected down from where it broke the low.
The double bottom chart pattern
Here the pattern applies to a falling market. Correspondingly, this pattern occurs when the falling price hits a low point and then goes back up. In the next sequence the price turns lower again but it doesn’t break through that previous low. When the price then surpasses the previous high, the pattern is completed. In this case, the target is perceived as the high of the double bottom, anticipated from that breakout point.
Trendlines and break outs
Usually, traders will seek to identify different trends when observing the market. Here the pattern one identifies is actually a trendline break. The trendlines in question are most commonly drawn underneath rising lows indicating buying, and above falling highs pointing to selling pressure. If there then is a break, in this level, it should be seen as a change of trend and traders should adjust accordingly.
The head and shoulder pattern
In this pattern there are three highs, a small peak, a larger peak and then a small peak again. The second peak is usually the largest (the head) and then there is a lower high in the third peak. This pattern is complete once the smaller trendline under the recent lows is broken and the price moves lower than the head.
The triangle is a continuation pattern, i.e. it indicates a “pause” in the market. When this pattern breaks, it will then usually continue the direction of the previous trend. An uptrend then means a break upwards, signalling to buy and vice versa.