Look for Patterns in Technical Charts

Studying price charts for patterns helps you identify future price movements that you can translate into profits.

Over time, people who studied charts noticed that when prices generated specific patterns, the price action that followed was usually the same. Through the first half of the previous century, technical analysts studied and analyzed charts to increase their knowledge of chart patterns and the price actions that those patterns predict. Although some analysts have used computers to develop sophisticated, complex indicators that they claim replace the need for studying chart patterns, some tried-and-true chart patterns remain unchallenged. By learning to recognize these patterns and what they prophesize, you can identify potential price changes and prepare to take appropriate action, whether it be a purchase to achieve a profit or a sale to protect your portfolio.

Chart patterns are divided into two main groups: continuation or consolidation patterns that suggest that an existing trend will pause or continue, and reversal patterns that suggest that the trend will go the other way. Pattern analysis can be complicated because some patterns act as either continuation or reversal patterns depending on what happened in earlier price action as well as current volume and other indicators.

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