What is chart pattern?
In the world of technical analysis, right next to support/resistance and trendlines, chart patterns are a core building block. Some outsiders to technical analysis consider this realm of technical analysis to be so esoteric and "mystical" that it turns them off. This is very unfortunate, because the
principles at work in the formation of these chart patterns are simply a reflection of good.
Patterns indicaten the psychology of a market.
• Patterns also determine the behavior of a market.
Perhaps it is the names that are attached to these patterns that give cause to the skeptical eye. If the Head & Shoulders pattern was renamed to something "academic" sounding like the "Demand/Supply Transition" pattern, it may be more acceptable.
One of the tenets of technical analysis is that markets trend. It has been observed that during the course of trend formation and trend reversal, prices often move in a repeatable, predictable fashion.
These observed price movements that occur during trend formation and during trend reversals have been labeled and given names. These are what we call chart patterns.
Goals of Chart Pattern Analysis
1. Identify the most predictable patterns.
2. Define rules for trading patterns which result in winning trades.
3. We should have more winners than losers, and the losses should be smaller than the gains.
• Chart Patterns are Predictive.
• However, identifying Chart Patterns that “work” 100% of the time is difficult (or impossible).
In the world of technical analysis, right next to support/resistance and trendlines, chart patterns are a core building block. Some outsiders to technical analysis consider this realm of technical analysis to be so esoteric and "mystical" that it turns them off. This is very unfortunate, because the
principles at work in the formation of these chart patterns are simply a reflection of good.
Patterns indicaten the psychology of a market.
• Patterns also determine the behavior of a market.
Perhaps it is the names that are attached to these patterns that give cause to the skeptical eye. If the Head & Shoulders pattern was renamed to something "academic" sounding like the "Demand/Supply Transition" pattern, it may be more acceptable.
One of the tenets of technical analysis is that markets trend. It has been observed that during the course of trend formation and trend reversal, prices often move in a repeatable, predictable fashion.
These observed price movements that occur during trend formation and during trend reversals have been labeled and given names. These are what we call chart patterns.
Goals of Chart Pattern Analysis
1. Identify the most predictable patterns.
2. Define rules for trading patterns which result in winning trades.
3. We should have more winners than losers, and the losses should be smaller than the gains.
• Chart Patterns are Predictive.
• However, identifying Chart Patterns that “work” 100% of the time is difficult (or impossible).
