Chart Patterns in Stock Market

A chart pattern is a shape within a price chart that helps to suggest what prices might do next, based on what they have done in the past. Chart patterns are the basis of technical analysis and require a trader to know exactly what they are looking at, as well as what they are looking for. Markets do one of three things — trend upward, trend downward, or consolidate. When a market trends upward, prices rise higher through a sequence of swings. The price makes higher highs and higher lows. When a markets in a downward trend, prices swing lower. They make lower highs and lower lows. When a market is consolidating in a trading range, we see prices move between key levels — support and resistance. Whatever the stock’s doing, certain patterns tend to form. We call these chart patterns. Traders use them to gain insight when making a trade. Patterns give traders an idea of what the market might do next. They also show us key levels.

Chart patterns can help you find good places to enter or exit a trade. Learning how to understand stock chart patterns can help you make a trading plan.

WHY IS CHART PATTERNS IMPORTANT IN TRADING?

Patterns matter to all traders from momentum day traders to position traders.

Day traders rely on technical analysis when looking for trades. Position traders do the same, but with a longer view in mind.

Patterns tell us what moves might happen. If you’re looking to take a trade, you want to know where the support and resistance are. You’re looking for key levels where other traders might buy or sell.

Chart patterns can help you with that.

If you’re oblivious to patterns, you’re trading at a disadvantage. You might as well be trading with your eyes closed.

WHY SHOULD TRADERS USE STOCK PATTERNS?

Traders have studied chart patterns for hundreds of years. A collection of distinct patterns plays out again and again.

Why? Because human emotions drive the markets. And human nature rarely changes.

Traders also tend to follow patterns. They respond in consistent ways when situations are similar.

That’s why chart patterns are key. They can give you insight into the underlying psychology of the market.

Understanding traders’ actions and reactions can provide insight into what might happen next. That can help you decide whether you should be long, short, or flat.

WHAT ARE THE DIFFERENT CHART TYPES USED IN TRADING & INVESTING?

A good trading strategy will give steady success, life-changing income, especially if a trader can execute it without taking more risk in one trade.

The technical analysis supports a diverse variety of charts, and many good trading strategies are using various charts.

As most traders know, charts are graphical displays of the price information of securities over time. They offer immense help to technical analysts to decide the Entry and Exit points and Stop Loss.

It is better to know the various varieties of charts used in stock market trading. Below are some of the essential chart types.

· Line chart

· Bar Chart

· Candlestick chart

· Renko chart

· Point and Figure

· Heikin Ashi

· Kagi

1. LINE CHART

A line chart is a graphical representation of an asset’s historical price action that connects a series of data points with a continuous line. This is the most basic type of chart used in finance, and it typically only depicts a security’s closing prices over time. Line charts can be used for any timeframe, but they most often make use of day-to-day

price changes. A line chart is the simplest form of chart and is formed by connecting the closing prices for each period over the selected time frame. It will not contain open, high, or low values of the selected period, and typically, investors use this chart to spot a trend. A line chart is easy to understand and simple in form, typically only depicting only changes in an asset’s closing price over time.

Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices.

Because of its simplicity, however, traders looking to identify patterns or trends may opt for chart types with more information, such as a candlestick.

1. BAR CHARTS

A bar chart is quite similar to a line chart. However, it offers much more information. Instead of a dot, each plot point in the graph is represented by a vertical line. This line has two horizontal lines extending from both the sides. Bar charts consist of multiple price bars, with each bar illustrating how the price of an asset or security moved over a specified time period. Each bar typically shows open, high, low, and closing (OHLC) prices, although this may be adjusted to show only the high, low, and close (HLC). Technical analysts use bar charts — or other chart types such as candlestick or line charts — to monitor price action, which aids in trading decisions. Bar charts allow traders to analyse trends, spot potential trend reversals, and monitor volatility and price movements.

It is represented as follows:

The top part of the vertical line represents the highest price at which the stock had traded during the day.

Similarly, the lower part represents the lowest traded price. The left extension represents the price at which the stock opened while the right extension represents the closing price for the day.

In addition to offering greater detail than a line chart, the bar chart also gives insight on volatility. If the line is longer, it means that there was greater volatility in the trading of the stock.

1. CANDLESTICK CHART.

Candlestick charts are very popular among technical analysts. They offer a great deal of information in a very precise manner. As the name suggests, the price movements for each day are represented in the shape of a candlestick.

It is similar to a bar chart because it represents the four data points: high, low, open and close.

While bar charts give volatility information only for a single trading day, candlestick charts can offer this information for a much larger time period. In addition, the candlesticks come in different colors based on the price movements.

A falling candlestick is generally represented by a black or red body while a rising candlestick is represented by a white or clear body.

-If the close is above the open, we can say that the candlestick is bullish which means that the market is rising in this period of time. Bullish candlesticks are always displayed as white candlestick. The most trading platform use white colour to refer to bullish candlesticks. But the colour doesn’t matter, you can use whatever colour you want. The most important is the open price and the close price.

-If the close is below the open, we can say that the candlestick is

bearish which indicates that the market is falling in this session.

Bearish candles are always displayed as black candlesticks. But this is

not a rule.

You can find different colours used to differentiate between bullish

and bearish candlesticks.

-The filled part of the candlestick is called the real body.

-The thin lines poking above and below the body are called shadows.

-The top of the upper shadow is the high

• The bottom of the lower shadow is the low.

• In the above picture, it is clear how the values are represented in the form of a candlestick.
• 1. RENKO CHART
• A Renko chart is a type of chart, developed by the Japanese, that is built using price movement rather than both price and standardized time intervals like most
• charts are. It is thought to be named after the Japanese word for bricks, “renga,” since the chart looks like a series of bricks. A new brick is created when the price moves a specified price amount, and each block is positioned at a 45-degree angle (up or down) to the prior brick. An up brick is typically colored white or green, while a down brick is typically colored black or red. A Japanese invention, Renko charts, one of the major types of charts in technical analysis, focus only on price changes and use price bricks to represent a fixed price move. They filter out minor price movements which make it easier to spot trends in prices. Also, this feature makes the chart appearance more uniform. A renko chart technical analysis is pretty effective in identifying support and resistance levels. You get a trading signal when there is a change in the direction of trend and the bricks alternate colors.

EXAMPLE OF HOW TO USE RENKO CHARTS

1. HEIKIN ASHI CHART

The Heikin-Ashi technique averages price data to create a Japanese candlestick chart that filters out market noise.

Heikin-Ashi charts, developed by Munehisa Homma in the 1700s, share some characteristics with standard candlestick charts but differ based on the values used to create each candle. Instead of using the open, high, low, and close like standard candlestick charts, the Heikin-Ashi technique uses a modified formula based on two-period averages. This gives the chart a smoother appearance, making it easier to spots trends and reversals, but also obscures gaps and some price data.

he downside to Heikin-Ashi is that some price data is lost with averaging, which could affect risk.

Long down candles with little upper shadow represent strong selling pressure, while long up candles with small or no lower shadows signal strong buying pressure.

How to Calculate Heikin-Ashi?

1. Use one period to create the first Heikin-Ashi (HA) candle, using the formulas. For example, use the high, low, open, and close to create the first HA close price. Use the open and close to create the first HA open. The high of the period will be the first HA high, and the low will be the first HA low.

2. With the first HA calculated, it is now possible to continue computing the HA candles per the formulas.

3. To calculate the next close, use the open, high, low, and close from that period.

4. To calculate the next open, use the prior open and prior close.

5. To calculate the next high, choose the max of the current period’s high, or the current period’s HA open or close.

6. To calculate the next low, choose the max of the current period’s low, or the current period’s HA open or close.

7. For steps five and six remember that the HA open and close are not the same as the period’s open and close. The HA open and close were calculated in steps three and four.

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