Stock Charts: Technical Analysis and Trading Patterns

Technical analysis is an alternative investing strategy to fundamental analysis and if used correctly can be especially effective.

Stock charts are like Swiss Army knives, they are super handy tools that can be used in a variety of ways. Not only do they tell a story of the stock, but they can also be used to make precise investment decisions. The style of using stock charts to make these investment decisions is known as technical analysis and is often viewed as the polar opposite of fundamental analysis. Whether using technical analysis or not, knowing how to read stock charts is extremely important to any investor.

What is Technical Analysis?

Where fundamental analysis looks at the stock's financial statements, its competitors and markets, technical analysis uses various stock charts to determine if the company is invest-able, pin-pointing the best price and time to invest. A stock chart shows you the history of a stock's price over time and comes in a variety of formats. There are a multitude of variables that you can control in the display of stock charts that are essential to the use of technical analysis including:

  1. Time: you can have stock charts that show minutes, days, weeks, months or even years worth of price history.
  2. Chart style: you can display the data as a line graph, mountain, graph, OHLC (Open-High-Low-Close), Candlesticks, and more.
  3. Scaling: the vertical axis can usually be adjusted between arithmetic and logarithmic scales. The arithmetic scale is what you would expect, showing the horizontal lines at even intervals of $5 or $10 dollars ($50 in the case of Google). The logarithmic scale give you a better visual of the percent change in stock price so that a stock that the distance between a price of $20 and $40 is the same distance as $40 to $80 (both of which are 100% returns).
  4. Volume: displays the amount of shares trading hands everyday usually as a bar graph.
  5. Moving Averages: are among the most popular and important tool available to newer investors because they are easy to use and understand. Also, moving averages are used as components in many other charts and analyses. By smoothing out data points and number series, moving averages make it easier to identify trends and tendencies.
  6. Trend lines: graphically display the unmistakable direction in which a stock is heading.

The key to technical analysis is the history of prices paid for a stock and the volume of shares traded. The security's intrinsic value is of no concern to those who employ technical analysis as a trading method but rather rely on charts and other tools to identify patterns and trends that can suggest future activity. In other words, the only thing that matters is a security's past trading data and what information this data can provide about where the security might move in the future. The field of technical analysis is based on three primary assumptions: price moves in trends, the market discounts everything, and history tends to repeat itself.

Technical analysis can be used on any security with historical trading data. Alternative investments such as Forex, fixed-income securities (think bonds), futures and commodities are all ripe for analysis of the technical sort as well. The common application, however, remains on traditional stocks. There are variety of pre-determined chart patterns that have been identified, labelled and used by those who employ the use of technical analysis for stock investing.

Types of Trading Patterns

Technical analysis investors attempt to identify charting patterns and trade the stock based on these pre-determined price movements. Here are some brief examples of the most popular trading patterns identified in technical analysis.

Double Bottom and Top: these formations are reversal patterns that most often identify medium term and long term trend changes.

Cup and Handle: this formation literally resembles it's named a cup with a handle at the end. It is widely known thanks to the CANSLIM trading strategy popularized by William O'Neil.

Saucers: also known as “rounded bottoms” or “U-Shape” formation have the same look and feel to them as the Cup and Handle pattern, except they lack a handle and often have a wider base. They are more difficult to trade as finding a proper entry point can be tricky, however when spotted, they can yield large returns.

Head and Shoulders: this formation can be the most difficult to spot but is historically reliable. It is a reversal pattern most often formed over a period of months.


BEST STOCK NEWSLETTER AWARD FOR 2020 STOCK PICKS (January 2, 2021 UPDATE)

The Motley Fool Stock Advisor wins our Award for the Best Stock Newsletter of 2020 with Average Stock Up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's over 5 years and over 120 stock picks. As of Friday, January 1, 2021, 21 of their 24 stocks picks from 2020 were up and the average return was 78% compared to the SP500's 19%. Take a look at some of their 2020 picks:

  • Lemonade (LMND) - Dec 3, 2020 pick is up 52%
  • Autodesk (ADSK) - October15 pick is up 21%
  • Fiverr Intl (FVRR) - Sept 3, 2020 pick is up 67% in just 4 months
  • CrowdStrike (CRWD) – June 4, 2020 pick is already up 120%
  • ServiceNow (NOW) – May 7, 2020 pick is up 44%
  • Zoom Video (ZM) – April 16, 2020 pick is up 124%
  • Shopify (SHOP) – April 2, 2020 pick and it is up 226%
  • Zoom Video (ZM) – March 19, 2020 pick re-recommended and it is already up 172%
  • DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 22%
  • NVTA picked February 6, 2020 is up 88%
  • Tesla (TSLA) picked January 2, 2020 before the crash and it is up 720% 

Now, no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super profitable (their 2019 picks are now up 113% and their 2018 picks are now up 200%). They also claim that since inception, their average pick is up 570% and now we believe them. Many analysts are saying that the BULL market will continue into 2021 with the Biden Presidency, so make sure you have the best stocks!

Normally the Fool service is priced at $199 per year but they are currently offering it for just $99/year on THIS NEW SUBSCRIBER PAGE

CLICK HERE to get The Motley Fool's Stock Picks for just $99 per Year! 


THE BEST STOCK NEWSLETTER FOR 2020 AWARD goes to The Motley Fool Stock Advisor whose picks were up 78%!

That beat the SP500's +19% and 21 of their 24 picks were up and 5 more than doubled! Get their next 24 stock picks in real-time for only $99/year (50% off).
Their first pick of 2021 is already up 27%.



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here's the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW

(before it's too late)


Leave a Comment