Skip to main content

The Most Reliable Chart Patterns


The Most Reliable Chart Patterns

By: George Angell

The following is an excerpt from Small Stocks, Big Profits 
In seeking a reliable chart pattern, a chart analyst will typically look to what worked best in the past.  When he finds such a pattern he will look for a similar configuration in analyzing potential stocks to buy.  As a rule, the propensity to identify tried-and-true patterns creates a sort of self-fulfilling occurrence: because a stock generates a bullish pattern, buyers rush in and the stock rises.  Therefore, if a pattern proves profitable, the investor will attempt to recreate the same model again.  He will do this until he begins to lose money.  He will then begin to look for another pattern. While there are no “sure-thing” patterns, there are commonly acceptable ones that routinely appear on price charts.  As a novice chartist, you will want to be familiar with the following widely-watched chart patterns:
  • The head-and-shoulders: One of the most reliable of all patterns, the head and shoulders, as the name suggests, appears as two well-defined “shoulder” with an extended “head” on the charts.  Chartists also attempt to identify the “neckline” which runs under the shoulders.  This neckline must be penetrated for the move to begin.  Occasionally, the market will break and return to the neckline prior to the real move occurring – the so-called “return move.”  A reversal pattern, the head-and-shoulders can signal a top or bottom.  The bottom reversal pattern will have the head point down and the top reversal patterns will have the head pointing upright.  With a little experience, these patterns are easy to spot.  As a general rule, a breakout from the neckline will carry the same distance as the distance between the top of the head to the neckline.  The time to start monitoring the head-and-shoulders pattern is when it is two-thirds formed – after the completion of the head. Once the second shoulder is formed it is simply a matter of buying or selling the breakout – or waiting for the return move to the neckline to place your position.  Because most low-priced stocks are better buying candidates than selling candidates, you are probably better off looking for a head-and-shoulders bottom to a top.
  • The saucer bottom: This is a compelling bottom pattern because it takes a long time to form and is easy to spot.  In a saucer formation, prices trade essentially sideway for a prolonged period, creating a gentle scoop like one would see in a soup dish.  Finally, prior to the breakout, the pattern is characterized by a “handle” formation.  The breakout from the handle is usually powerful. Saucer bottoms require the investor to be patient.  This pattern is also known as a cup-and-handle.
  • Rising and falling wedges: These tend to be continuation patterns, way stations where prices hesitate prior to resuming the prior trend.  Formed in the shape of a wedge, these continuation patterns give one time to exit profitable positions or initiate a new position before the inevitable upward or downward trend continues.
  • Ascending, descending and symmetrical triangles: The best way to characterize triangles is to say that they become tightly wound prior to the breakout.  In a triangle, prices are gyrating back and forth in tighter and tighter ranges as the apex is approached.  At the apex, prices break out higher or lower depending on which pattern is occurring. In the ascending triangle, prices rise up to the resistance as they approach the apex; in the descending triangle, prices trade near the support prior to breaking down; lastly, in the symmetrical triangle, prices trade in a narrow range near the middle of the triangle as they approach the apex.  The breakout signals the direction of the move.
  • Double and triple bottoms and tops: These can be the most significant of all chart patterns.  A double bottom occurs when prices trade to a key support level twice.  They then bounce off that level.  The reverse is true of a double top where prices bounce down from a resistance level.  Triple tops and bottoms are even more important.  The rule is that on the third attempt to penetrate a support or a resistance, the price must go.  Otherwise, if the support or resistance holds, prices will go in the opposite direction.
  • Gaps: Gaps can be a powerful pattern.  Used by so-called momentum investors, who rely on high-volume breakouts to pinpoint opportunities, gaps can signal when a stock is poised to run – or, in some instances, when a price move is exhausted.  The particular stage of the price move is reflected in the names given to gaps, such as breakaway, continuation, and exhaustion gaps.  In each of these gaps, be careful if you are planning to utilize the gap as a justification for taking a position.  Whereas the breakaway gap is often a legitimate buy signal, the exhaustion gap, as the name suggests, can be quite the opposite.

Comments

Popular posts from this blog

Intraday Software Using Trading Strategy For Generating Buy Sell Auto Signals

NIFTY RANGEBOUND—STOCK MARKET DIRECTIONLESS The stock market appears to halt at a tri-junction with no absolute clue about where to move.   CNX IT, however did manage to bounce back for two days but it is clearly looking like more of an bounce back when intraday indicators were slightly oversold and the index kind of manage to hold on for couple of days.   It recorded about 100 to 150 pointy kind of a bounce back.   The chart analysis indicates some crucial movement from here.   The nifty future might see a upward swing after a sharp correction.         Notwithstanding the fact, this kind of a decline was not expected.   For Infosys, 2150 is an important weekly closing pivot that could be a good target for it.   In fact, that is something which Intradaytrading software looks for making a pretty sure intraday trade in the stock.         The technical analysis of the ni...
Markets at a Glance Indian indices are likely to open lower today, tracking weakness in the Asian markets, as disap-pointing China’s PMI data raised concern over domestic economic slowdown. Meanwhile Asian shares falters on Wednesday on fading hopes of stimulus action this week by the US Federal Reserve and the European Central Bank. The Chinese manufacturing PMI slipped to 50.1 in July from 50.2 in June, the weakest since November 2011, and reflects three consecutive months of decline. However, the Shanghai Composite index edged up ~1% following the comments from Premier Wen Jiabao's that China will step up policy fine-tuning in the second half to support economic growth. The SGX Nifty, Aug’12 contract last traded at 5,239, down by 10.00 points from previous session. Wall Street Update The US markets ended lower after trading in a tight range throughout the day as investors re-mained cautious ahead of the US Federal Reserve and the European Central Bank releasing monetary...

Intraday Trading System | Nifty Signals Software

Super Stock Trading System for Day Trading Auto Buy Sell Signals for Making Money on The Stock Markets. Te company Techno Trades And Services( www.technotrades.biz ) which is a highly reputed company existing in the research and developments of Intraday Trading Systems And Software for generating Mechanical Buy Sell Signals . The Day Trading System is a Technical Analysis Software inbuilt with many professional Trading Systems and templates along with plethora of indicators. The Day Trading Systems are based on some stock market technical secret Intraday Strategies which are being followed by the big bulls and bears or you may call them institutional players. As is the common perception of the day trader that they will only lose their capital in the markets, we have taken up the hard mission of providing readymade solutions to the retail traders, so that they are trained to follow the entry and exit based on the Buy Sell Signals generated on Stocks, Equity, Commodities Like Nift...