Stock Chart Patterns

Have you ever wished there was a stock market crystal ball? Or a stock palm reader? Or anything that you could use to forecast the stock market? Unfortunately, there is not any way to entirely predict the market, but there are some tools that may be able to help.

One of these tools is stock chart pattern analysis. This idea in market trend predictions uses trendlines, patterns, and breakouts to help analysts predict a stock's direction. In fact, the relatively accurate patterns help analysts predict the direction about 75% of the time. Those are pretty good odds, so let’s take a look at the basics of stock chart patterns, starting with the definitions.

What is a Stock Chart Pattern?

Whenever you look at a stock chart, which tracks the stock's performance over a period of time, you will often see many dips and spikes. These variations are very normal in business and in the stock market, so they often only indicate the natural course of the business's production.

However, sometimes the dips and spikes can indicate more about the stock and about the business, and this is where stock chart patterns come in. When the stock forms a certain pattern, traders can often predict if the stock price will increase or decrease, based upon trendlines and breakouts. Let's look at these in depth.

What is a Trendline?

Trendlines are the points in the stock chart at which the price continuously stops. So let's say that General Mills was selling around $35.00 per share but kept jumping to $38.00. The share bounces between $35 and $38 for months, and it never goes above $38 and never goes below $38 per share. We can therefore identify $38 as the top trendline and $35 as the bottom trendline.

What is a Breakout?

The breakout is the point in which the share price surpasses the trendline. So in our General Mills example, if the stock were to go above $38 or below $35, the stock breaks out of its trend. This becomes important because as soon as the stock breaks out of its trendline, the stock analyst can predict (*remember, only with 75% accuracy) what direction the stock will go – and if you should buy or sell.

Now, we just touched on the basic ideas of stock chart patterns today, but as we move forward into future stock chart pattern posts, we'll go a little more in depth. There is a lot of information about this idea in "stock prediction," and some of these ideas could help you decide the best time to buy or sell.

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Anonymous's picture

Financial Definitions - Glossary for Understanding Finances wrote:

Thu, 01/19/2012 - 21:47 Comment #: 1

[...] Short Sale Specialty Funds Stocks, Chart Patterns Stocks, Global Stocks Stocks, Indices Stock Orders Stocks, [...]

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Everything You Need to Know about Stocks | MomVesting wrote:

Thu, 01/19/2012 - 21:47 Comment #: 2

[...] Stock chart patterns can help you track the past performance of a particular stock. See how to use these tools. [...]

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