Technical Analysis: Chart Patterns and How to Use Them

When it comes to learning the stock market, a must learn is technical analysis. Technical analysis allows you to construct a sound opinion on whether or not a stock will go down or up, and are often good indicators of such movements. In addition, technical analysis comes in forms of chart patterns and indicators. Today we will focus on chart patterns. Do remember, news often trumps technical analysis, so this is not a sure fire way of predicting whether a stock will move in a certain direction. Always do your due diligence and plan for any unforeseen changes in the stock.


What is Technical Analysis?

There are three main types of patterns when looking at analyzing a stock. You have bullish patterns, which are usually an indicator of positive price action. Then there are bearish patterns that typically indicate a negative price action. Also in between the two there are neutral patterns. Neutral patterns are pretty self explanatory, they don’t indicate a positive or negative price action, but more of a consolidation in price action that lead to the stock moving in either direction.


Bullish Patterns

Bullish chart patterns are a very good indicator of the price action moving in a positive direction. These patterns can help with knowing when to buy a general stock or placing a call. There are quite a few types, but for now we are just going to go over the most common patterns that can be found in the market.

Double Bottom

The double bottom, also called the George W, can be found commonly amongst almost every stock and will often lead to a continued rise in price action. This pattern can have an ascending, descending, or neutral level of support. It signifies buying strength as the stock tried to move past a level of support, but buyers stepped in both times and the stock continued to rise.

George W chart pattern, also double bottom.
Double Bottom

Cup & Handle

This pattern looks exactly like what it is named, a cup and handle. Some are a little messier than others, but overall they can be identified fairly easily. The rounding bottom (The Cup) is followed by a slight breakout downwards (The Handle), however, it is really a consolidation period before a breakout that can be about 1/3 of the cups height.

Cup and handle chart pattern.
Cup & Handle

Bearish Patterns

Bearish Patterns are the exact opposite of bullish patterns, which means they often indicate a price action that moves in a downward direction. They can be helpful in playing a short position or placing puts on a certain stock.

Head & Shoulders

The head & shoulders pattern is, in my opinion, the most common bearish pattern that can be found in the market. It consists of a top, followed by a higher top, which is then followed by a top the same height as the first, and resembles the head and shoulders of a person.

Head and shoulders chart pattern.
Head & Shoulders

Double Top

A double top pattern is basically an inverse of the double bottom. It signifies significant selling pressure as the price tries a resistance level two times and fails to move past either time, thus causing a negative breakdown in price action.

Double top pattern
Double Top

Recap

Knowing how to technically analyze the stock market is an incredible tool to have in your arsenal and can potentially get you life changing gains. As always, do remember that news trumps technical analysis, so even the cleanest looking cup & handle could breakdown with a bad earnings or bad news. Do your own due diligence when it comes to the stocks you are interested, and of course, if you like my content feel free to subscribe for email updates on future posts!




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