What Is a Chart Pattern?
A chart pattern is a formation that represents the former path of price itself. Chart patterns are constructed directly from market data that has been filtered with respect to periodicity and type. Popular intervals are tick, minute, hour, and day, and common chart types are candlestick, OHLC, and line. A few traditional formations are morning and evening stars, dojis, pennants, head-and-shoulders, wedges, and hammers.
Chart patterns trading strategies may be applied to any market using any periodicity. In fact, legions of active traders do so daily, searching for those with positive forecasting capabilities. Although chart patterns are valuable technical tools, it’s important to be aware of their unique benefits and shortcomings.
Chart patterns trading is often equated to buying and selling at the direction of technical indicators. However, although chart patterns are considered to be technical tools, they differ in many ways from indicators. If you’re in the process of becoming a market technician, then it’s important to understand the functionality, pros, and cons of both chart patterns and indicators.
CHART PATTERNS FOR DAY TRADING
Market traders commonly use chart patterns to identify positive-expectation trading opportunities. When used in conjunction with other indicators, such as support and resistance levels, chart patterns can be powerful tools for generating profits.
Like most technical indicators, chart patterns for day trading function best when used with other technical tools. For instance, combining chart patterns with the following technicals can greatly enhance your ability to identify potential market breakouts:
Key numbers: Key numbers may be naturally occurring round numbers or previous daily, weekly, monthly, or yearly extremes.
Support and resistance levels: Support and resistance levels are a product of technical indicators or additional studies. Fibonacci tools, moving averages, and pivot points are a few examples.