A Basic Technical Analysis Course for Pattern Analysis
- July 10th, 2009
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What is pattern analysis? It is basically the reading of charts. It is stated oftentimes that chart reading is not as easy as the easy memorizing of patterns and recalling what they mean. This is true, because any stock chart is a combination of different patterns, and that is why accurate analysis relies on consistent study, experience and individualized knowledge of elements both technical and fundamental, and, in some ways and in some measure, the capability to weigh various opposing indications, to appraise patterns in view of their minute, composite details and in the recognition of fixed, memorized formulae.
What are the reasons why market participants purchase and sell securities in the market? Knowing those reasons will help us make superior informed decisions about buying and selling securities, and knowing those reasons is a key part of technical analysis in pattern analysis. There are thousands of market participants at any point selling and buying securities for many reasons, motives and from different financial positions and information/ knowledge positions: for instance, a wide spectrum might have a love of return and a concomitant hope of gain, an aggressive optimism, hedging, with stop loss triggers, with price target triggers, using perhaps fundamental analysis, or perhaps utilising technical analysis, basing decisions on broker recommendations, and many more. Trying to figure out why participants are buying and selling can therefore be challenging. Chart patterns thus place buying and selling into appearance by combining supply and demand into a kind of concise picture. As a visual and complete record of trading and prices, chart patterns wage a framework to examine bulls and bears in stock price movements. Hence, chart patterns and technical analysis can help us determine the true, larger picture.
What might pattern analysis do? Pattern analysis can be utilised to make short term or long term forecasts about stock prices. Data can be intraday, daily, weekly or monthly, and patterns can be as short as one day or as long as many, many years. Furthermore, for example, gaps and outside reversals might form very swiftly in one single trading session, while, broadening tops and dormant bottoms might take months to be established.
Yet it should be stated that technical analysis can be science and, then again at other times, art. In addition, pattern recognition is open to interpretation, subject to individualized bias. To defend against bias and confirm pattern interpretations, other aspects of technical analysis should be used to verify or refute conclusions. While price patterns might seem similar, no two patterns are alike. False breakouts and exceptions are all part of the game. Hence, careful constant study is required for successful chart analysis. In addition, it is important to know that two basic tenets of technical analysis are that prices trend and that history repeats itself. An uptrend indicates that demand is in control, and a downtrend, that supply is in control. As the equilibrise shifts, a pattern emerges. The majority of patterns start into two main groups: reversal and continuation. Reversal patterns indicate a change of trend. Continuation patterns indicate a pause in trend, suggesting that the previous direction will resume later. However, just because a pattern forms after a significant advance or decline does not mean necessarily that it is a reversal pattern. Much depends on previous price actions, volume and more as the pattern evolves. This is where technical analysis becomes an art.
To conclude: pattern analysis is the reading of charts, but it’s not that simple. The various motives that motivate and actuate people in the market are part of charts and patterns, and discerning the charts and patterns requires some insight into such behaviour. Yet at the same time, chart analysis and pattern recognition are not science, but art, meaning that good technical analysis is always hard to do accurately. Hence, to give some key important recommendations to budding new technical analysts, the keys to successful chart pattern analysis are dedication, a continual dedication to learn, focus, by limiting charts, indicators and methods, and consistency, where one should maintain charts regularly and study patterns often.
Shawn Seah is a blogger who writes on diverse topics, primarily investment and education. He has a website on Ideas on how to become rich as well as other blogs on many diverse topics, such as How to learn German fast, English language resources, and more.