Chapter 13

Identifying Chart Patterns

Another form of technical analysis (TA) focuses on the identification of Chart Patterns on a stock’s price chart. Whether you are a fundamental trader or technical trader (or both), the question of all questions (aside from knowing what to buy or sell) is when to buy or sell.

Fundamentals, of course, are ultimately the key in determining the price or value of a stock. And statistics have shown that companies receiving upward earnings estimate revisions outperform the market, while companies receiving downward earnings estimate revisions underperform the market.

But technical analysis, like price and volume patterns and moving averages (which we just discussed) and chart pattern identification (which we’re going to look at now), can give you insight about when the market is ready to react to those fundamentals.

Very often, the price action on a chart can form meaningful patterns. These chart patterns reflect the collective buying and selling sentiment of the market and can, in turn, be used in trying to forecast future price direction and the timing surrounding it.

Keep in mind that nothing is foolproof. But a strong fundamental outlook combined with a good technical viewpoint creates a very potent combination for the trader and investor.

Different chart patterns can be classified as either continuation patterns or reversal patterns:

Continuation Patterns generally will continue in the direction of the trend. For example: if a stock is in ...

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