A chart pattern is a "shape" on a market chart that can give a clue to a potential future price movement. The price movement can be a continuation or a reversal of trend and with these clues traders' can prepare to execute buy or sell orders. The theory behind charting is that markets are fractal in nature, so in supposition there’s a significant probability that the future price movement in a market will follow the historical movement seen in chart patterns. Sounds stupid and unlikely doesn't it? But in fact this has a significant psychological bearing on all market players' and links in with Module 6 on Trading Psychology. Hence, we will be Looking at historical patterns to try to determine where the markets are gong to go in the future.
Chart Patterns put all buying and selling into perspective by consolidating the forces of supply and demand into a concise picture. As a complete pictorial record of all trading, chart patterns provide a framework to analyse the battle raging between bulls and bears. More importantly, chart patterns, support and resistance and price action can help determine who is winning the psychological battle, allowing traders and investors to position themselves accordingly. They also work on all time frames, so whether you're a scalp trader with an intra-day horizon, or a longer term trader, they'll work for you. Module 5 on Price Action's linked closely with this module and don't forget support and resistance :-)
Richard Schabacker laid the foundations of chart analysis way back in the 30's. Schabacker thought chart reading was a science, but in reality it's a reflection of traders' mindset and sentiment. Patterns forming in market charts can sometimes be open to interpretation, are often quite hard to spot and frequently signals don't turn out the way you thought they would. This is why we engage other areas of TA for further signal confirmation when making trading decisions.
Chart patterns come in all shapes and sizes and we won't delve into them all at this time. Here we'll look at the most popular ones, watched by most Chartists, but there are literally dozens out there. One thing to remember is it’s always good to find a strong pattern and not one that lingers… So, in the next few lessons we will have a look at the following Technical Charting Patterns
There are many more patterns, which have been discovered and used by academics and traders alike. We've touched on the most popular patterns above, but others out there include:
Articles on these additional patterns may be added at a future date.