In this lesson we are going to discuss the standard chart patterns you need to become familiar with as you become a more accomplished trader.
It is very important that a trader develop the skill of pattern recognition. It is even more important than learning any or all of the advance indicators. When you develop this skill, you will have a better view of who's in control, either buyers or sellers. Knowing this will put us on the right direction on each of your trades.
There are two basic types of chart patters:
Momentum(Breakouts)- Here the security is gathering momentum and is likely to continue on that direction.
Exhaustion(Reversal)- Here you will see that the certain move is about to come to an end.
We will outline some of the more instantly recognizable chart patterns.
Let us begin with Support and Resistance.
Support and Resistance is probably the most used yet the simplest chart pattern to understand and the easiest to identify just by glancing at the chart.
Support is where the price finds a base at which the demand at that level is strong enough to stop the price from falling any further. These levels are identified somewhere below where the stock is actually trading. Support is not identified on an exact point but is somewhere around a general price area. Think of support as if it's a floor or base. In this level, buyers are more motivated than the sellers. There will be times that the support line may seem not so clear but over time you will develop the skills and you will easily pick out your support level.
Resistance is where the price finds a ceiling in which the selling pressure is strong enough to stop the stock or security from going up any further. At this level the buyers are loosing steam and the sellers and stepping back in. Again, like support it is not an exact price but a general area. Think of this area as a level where supply has surpassed demand. Traders should be aware on where the sellers are stacking up before going long on any position.
Attached is a 150 day daily chart for APA an example of a stock that has been trading in a channel.
The bottom blue line is your support line, which connects the lows of the channel. Here we are looking for an area where there is a history of buying activity. Looking at these level, we can say that this area is an area of demand because in this area buyers are able to push the price back up from that level. And if the price to continue to drop and break through the line, it simply means that the buyers are loosing the battle from the sellers and are not able to hold up the stock...sellers are stepping in and now are in control.
The top line is your resistance line, which connects the highs of the channel. We are looking for an area where there is history of selling activity. It is okay to see any highs that crossed slightly above the line because again we are looking for an area and not exact price points. In this area, the buyers are loosing steam and are not able to push the price up any further. The sellers at this point are starting to come back in.
Should we see a strong move over the resistance line with high volume, this event is called a breakout. A breakout occurs when buyers starts to get aggressive and continues to push the price above the resistance line on strong volume. When the sellers see this, they will raise their selling prices to see how far the buyers will chase the market.
Often when support and resistance are broken, they form the opposite of what they used to be. Hence the term "Role Reversal."
Old support becomes new resistance, Old resistance becomes new support.
When Looking at a chart, the first question you need to ask is "who is in control? Buyers or Sellers?"
We will talk more about Role Reversals on our next lesson. Here we will be discussing why buyers buy when they do and why sellers sell when they do. We will also discuss why traders put more weight in the closing price. In order to understand this, we need to get inside the mind of a professional trader. There is a saying that amateurs open the market, while the pros close the market.
It is very important that a trader develop the skill of pattern recognition. It is even more important than learning any or all of the advance indicators. When you develop this skill, you will have a better view of who's in control, either buyers or sellers. Knowing this will put us on the right direction on each of your trades.
There are two basic types of chart patters:
Momentum(Breakouts)- Here the security is gathering momentum and is likely to continue on that direction.
Exhaustion(Reversal)- Here you will see that the certain move is about to come to an end.
We will outline some of the more instantly recognizable chart patterns.
Let us begin with Support and Resistance.
Support and Resistance is probably the most used yet the simplest chart pattern to understand and the easiest to identify just by glancing at the chart.
Support is where the price finds a base at which the demand at that level is strong enough to stop the price from falling any further. These levels are identified somewhere below where the stock is actually trading. Support is not identified on an exact point but is somewhere around a general price area. Think of support as if it's a floor or base. In this level, buyers are more motivated than the sellers. There will be times that the support line may seem not so clear but over time you will develop the skills and you will easily pick out your support level.
Resistance is where the price finds a ceiling in which the selling pressure is strong enough to stop the stock or security from going up any further. At this level the buyers are loosing steam and the sellers and stepping back in. Again, like support it is not an exact price but a general area. Think of this area as a level where supply has surpassed demand. Traders should be aware on where the sellers are stacking up before going long on any position.
Attached is a 150 day daily chart for APA an example of a stock that has been trading in a channel.
The bottom blue line is your support line, which connects the lows of the channel. Here we are looking for an area where there is a history of buying activity. Looking at these level, we can say that this area is an area of demand because in this area buyers are able to push the price back up from that level. And if the price to continue to drop and break through the line, it simply means that the buyers are loosing the battle from the sellers and are not able to hold up the stock...sellers are stepping in and now are in control.
The top line is your resistance line, which connects the highs of the channel. We are looking for an area where there is history of selling activity. It is okay to see any highs that crossed slightly above the line because again we are looking for an area and not exact price points. In this area, the buyers are loosing steam and are not able to push the price up any further. The sellers at this point are starting to come back in.
Should we see a strong move over the resistance line with high volume, this event is called a breakout. A breakout occurs when buyers starts to get aggressive and continues to push the price above the resistance line on strong volume. When the sellers see this, they will raise their selling prices to see how far the buyers will chase the market.
Often when support and resistance are broken, they form the opposite of what they used to be. Hence the term "Role Reversal."
Old support becomes new resistance, Old resistance becomes new support.
When Looking at a chart, the first question you need to ask is "who is in control? Buyers or Sellers?"
We will talk more about Role Reversals on our next lesson. Here we will be discussing why buyers buy when they do and why sellers sell when they do. We will also discuss why traders put more weight in the closing price. In order to understand this, we need to get inside the mind of a professional trader. There is a saying that amateurs open the market, while the pros close the market.
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RonaldBMZ- Site Admin
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