Stock Technical Analysis For Beginners

Stock Technical Analysis For Beginners – Stock chart patterns often indicate changes between rising and falling trends. A price pattern is a recognizable configuration of price movement identified using a series of trendlines and/or curves.

When a price pattern indicates a change in trend direction, it is known as a reversal pattern; A continuation pattern occurs when the trend continues in the existing direction after a brief break. There are many patterns that traders use—here’s how the patterns are made and some of the most popular.

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Since price patterns are identified using a series of lines or curves, it helps to understand trendlines and know how to draw them. Trendlines help technical analysts identify support and resistance areas on a price chart. Trendlines are straight lines drawn on a chart connecting a series of descending peaks (highs) or ascending troughs (lows).

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An upward angle of a trendline, or an upward trendline, occurs where prices are experiencing high highs and high lows. An up trendline is drawn by connecting ascending lows. In contrast, a trendline called a down trendline has a downward angle, where prices are experiencing lower highs and lower lows.

Although there are different ideas about which part of a price bar to use, the body of the candle bar—not the thin wicks above and below the candle body—often indicates where the most price action has occurred and thus may provide a more accurate point for drawing a trendline, especially “outliers” on intraday charts. (there may be data points that fall well outside the “normal” range).

On daily charts, chartists often use closing prices instead of highs or lows to draw trendlines, as closing prices represent an overnight or weekend market holiday for traders and investors. Trendlines with three or more points are generally more valid than those based on just two points.

A continuation pattern can be considered a pause in a prevailing trend. This happens when bulls catch their breath while in an uptrend or bears take a momentary rest in a downtrend. When a price pattern is forming, there is no way to tell if the trend will continue or reverse. As such, careful attention should be paid to the trendlines used to draw the price pattern and whether the price breaks above or below the continuation zone. Technical analysts generally recommend that the trend continue until a reversal is confirmed.

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Generally, the longer a price pattern takes time to develop and the larger the price movement in the pattern, the more significant the move after price breaks above or below the continuation area.

If the price continues in its trend, the price pattern is called a continuation pattern. Common Continuity Patterns:

A price pattern that indicates a change in the current trend is called a reversal pattern. These patterns represent periods when the bulls or bears have run out of steam. An established trend pauses, then moves in a new direction as new energy emerges from the other side (bull or bear).

For example, an uptrend supported by enthusiasm from bulls may pause, indicating pressure from both bulls and bears, and then eventually give way to bears. This leads to a change in tendency towards negativity.

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Reversals at market tops are known as distribution patterns, where a trading instrument sells more enthusiastically than it buys. Conversely, reversals that occur at the bottom of the market are called accumulation patterns, where the trading instrument is actively bought rather than sold.

The pattern takes longer to develop and the longer the price movement in the pattern, the larger the expected move once the price breaks out.

When the price reverses after a pause, the price pattern is called a reversal pattern. Examples of common reversal patterns:

Pennants are continuation patterns drawn with two trendlines that eventually intersect. A key feature of pennants is that trendlines move in two directions—one is a down trendline and the other is an up trendline. The figure below shows an example of a pennant. Often, volume decreases during a pennant formation, only to increase when price eventually breaks out.

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A bullish pennant is a pattern that indicates an upward trending price—the flagpole is to the left of the pennant.

A bearish pennant is a pattern that indicates a downward trend in prices. In a bearish pattern, volume falls and a flagpole forms to the right of the pennant.

Flags are continuation patterns constructed using two parallel trendlines that are either up, down or sideways (horizontal). Generally, a flag with an upward slope (bullish) is seen as a pause in a down-trending market; A flag with a downward bias (bearish) indicates a break during a trending market. Usually, the formation of a flag is accompanied by declining volume, which recovers when the price breaks out of the flag formation.

Wedges are continuation patterns similar to pennants that are drawn using two converging trendlines; However, a breakout is characterized by the fact that two trendlines are moving in the same direction, up or down.

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A wedge represents a break during an uptrend with a down angle; A wedge shows a temporary interruption during a falling market. As with pennants and flags, volume typically decreases during pattern formation, only to increase after price breaks above or below a wedge pattern.

Splits differ from triangles and pennants in that they reflect only up and down price movements, so a split is usually seen at an angle.

An ascending triangle is a continuation pattern that identifies a trend with a specific entry point, profit target and stop loss level. The resistance line meets the breakout line, showing the entry point. The ascending triangle is a bullish trading pattern.

A descending triangle is the opposite of an ascending triangle, indicating that demand is decreasing and a descending upper trend line breakdown is likely to occur.

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Symmetrical triangles form when two trend lines intersect and only indicate that a breakout is likely—not an up or down trend. The size of breakouts or breakdowns is usually equal to the height of the left vertical side of the triangle as shown in the figure below.

The cup and handle is a bullish continuation pattern where the uptrend is paused but continues when the pattern is confirmed. The “cup” portion of the pattern should have a “U” shape that surrounds the bowl rather than a “V” shape with equal heights on both sides of the cup.

The “handle” is formed on the right side of the cup as a small pullback resembling a flag or pennant chart pattern. After the handle is completed, the stock may breakout to new highs and resume its trend.

A head and shoulders is a reversal pattern that appears at market tops or bottoms in a series of three pushes: an initial peak or trough, followed by a second and larger one, and then a third push that mimics the first.

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If the uptrend is interrupted by the head and shoulders top pattern then the trend will face a reversal, resulting in a downtrend. Conversely, a bearish trend leading to a head and shoulders bottom (or inverse head and shoulders) is likely to turn the trend upside down.

Horizontal or slightly inclined trendlines can be drawn connecting peaks and troughs between the head and shoulders, as shown in the figure below. Volume may decrease as the pattern develops after price breaks above the trendline (if the head and shoulders are below) or below (if the head and shoulders are above).

Double top or bottom reversal patterns are signaling areas where the market has made two unsuccessful attempts to break through a support or resistance level.

A double top often looks like the letter M and Isan reaches the initial push up resistance level, followed by a second failed attempt, resulting in a trend reversal.

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A double bottom, on the other hand, appears like a wand letter when the price attempts to break through the support level, is rejected, and then makes a second unsuccessful attempt to breach the support level. This often results in a trend reversal as shown in the figure below.

Triple tops and bottoms are reversal patterns that are not as dominant as heads and shoulders, double tops or double bottoms. But, they work similarly and can be a powerful trading signal for a trend reversal. Patterns are formed when the price tests the same support or resistance level three times and fails to break them.

A double bottom occurs when there are two lows at the same high, which indicates that sellers are in a weaker position than they are.

Gaps are reversal patterns. They occur when there is a gap between two trading periods due to a significant increase or decrease in price. For example, a stock may close at $5.00 and open at $7.00 after positive earnings or other news.

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