The stock market has grown in popularity to attract a large number of investors. But, the preparation to enter it doesn’t end when you open demat account. In fact, it just begins. Before making your bets, it is necessary to learn how to analyse stocks properly. Technical analysis of a stock is a method of analysing market data that involves spotting patterns in the evolution of stock prices over time. It aids investors in determining whether a stock’s value is likely to increase or decrease in the future.
Chart Patterns In Technical Analysis
Reading chart patterns and using technical indicators on stock charts are the two basic methods used in the technical analysis of equities. You must be familiar with different chart patterns, candlestick patterns, and technical indicators before you begin your stock research for trading. Chart patterns have repercussions that might help predict the likely future direction of a stock’s movement. The bearish patterns signal short-selling stocks to profit from falling stock prices, while bullish patterns suggest entering new buy positions. Moreover, chart patterns are complemented by technical indicators. They lend more trust to the likelihood of price movement direction and momentum as indicated by patterns.
How Chart Patterns Help
You can choose whether to purchase x` or sell a stock by looking at charts with patterns and indicators. When you are comfortable with these tools and review charts frequently, it becomes simpler to discover trade chances. When specific interactions between market forces take place, these patterns produced by price movement on market charts repeatedly recur. These patterns identify market situations where a trader can profit from a statistical edge.
Analysing Price Action
The process of analyzing stock price movement over a period of time on technical charts is known as price action. The technical analysis of stocks is built on this. Determine the stock price trend before you study the price movement. Unless a significant event alters the trend, it is expected that any stock moving in a trend will do so indefinitely. Political news, earnings results, or other firm management-related news could be the event. Your aim is to recognize the trend and follow it for as long as possible. Three methods exist for spotting a trend:
- Peaks (highs) and troughs (lows) on the chart
- Moving averages
- Trend lines
A stock on an uptrend has higher tops and lower lows. A downtrend in the stock price is indicated by lower tops and lower lows.
Trendlines
Straight lines called trend lines are used to show market changes. Higher highs and lower lows characterise an uptrend. An uptrend line is drawn above price levels to show resistance holding prices down and below price levels to show support levels. Lower lows and lower highs are signs of a downtrend in the market. The resistance levels are depicted by downward trend lines drawn above the prices. The line must be drawn from at least two places. The trendline will be more valid the more points that are suitable on the line.
Candlesticks: They consist of a component known as the body, which symbolises the beginning and end of the price for that time period. The candle also has a part that extends above and below the body, which represents the high and low points for that time period. Shadows are the name for these longer extensions.
Types of Chart Patterns
Let’s now briefly look at the different chart patterns commonly used in technical analysis.
- Head and Shoulders: Trend reversal pattern with a peak (head) and two lower peaks (shoulders).
- Double Top/Bottom: Reversal pattern characterised by two consecutive peaks (top) or troughs (bottom) at the same level.
- Triangle: Continuation pattern formed by converging trendlines, indicating a period of consolidation before a potential breakout.
- Flag: Continuation pattern resembling a rectangular flag, indicating a temporary pause in the trend before resuming in the same direction.
- Cup and Handle: Bullish continuation pattern with a rounded bottom (cup) followed by a smaller consolidation (handle) before an upward move.
- Wedge: Trend reversal or continuation pattern characterised by converging trendlines, either sloping upwards (rising wedge) or downwards (falling wedge).
- Pennant: Continuation pattern resembling a small symmetrical triangle, indicating a brief consolidation before a resumption of the trend.
- Double Top/Bottom: Reversal pattern characterised by two consecutive peaks (top) or troughs (bottom) at the same level.
- Ascending/Descending Triangle: Continuation pattern formed by a flat top (ascending) or flat bottom (descending) trendline, indicating potential breakouts.
- Hammers/Shooting Stars: Candlestick reversal patterns with small bodies and long lower shadows (hammers) or upper shadows (shooting stars).
Final Thoughts
The direction of a stock’s price movement over time can be foreseen using technical analysis of the stock. For this, reading chart patterns becomes highly crucial. The easiest, and most efficient, strategy is to identify the trend and trade the stocks in that direction using support and resistance levels as the stop-loss and target price. Keep in mind that you should essentially stick to the closing prices of periods when constructing trendlines. To conveniently follow chart patterns look for an excellent demat app for android that gives access to numerous trading tools. blinkX is one such reputed platform on which you get access to all key trading tools and indicators in one single subscription.
