Chart patterns

 

What are ‘’chart patterns’’?

According to Wikipedia, a chart pattern or price pattern is a pattern within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern that naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals.

Why chart patterns is important?

Chart patterns are an excellent way to condense large amounts of information into easy-to-understand formats that clearly highlight the points you’d like to make. There are many different chart types available, and sometimes the hardest part is deciding which chart type is best for your needs.

When presenting your information, you should think about what you want your readers to take away from the information and make those points stand out. Different types of charts are best for certain circumstances. Decide what you want the takeaway to be, then choose the type of graph that will best clearly and concisely present your information.

By charting the price movements of a stock over some time, you will get a convenient and easy-to-read source of information. Also, you will have a complete record of a stock’s trading history in a brief look.

The reason is clear. If you want to know where stock prices are going, you must know where they have been. Right?

Hence, charts are a fundamental element of technical analysis. According to technical analysis, the market is, basically, groups of buyers on the opposite side of groups of sellers. But they are nothing without each other.

The truth is: there is no buying without selling.

Put buyers and sellers together and the order of supply and demand is there.

So, when demand exceeds supply, prices rise, logically. When supply exceeds demand, prices decrease.

Therefore, the price movements of stock are the key tools of a technical analyst.

They will tell you whether the market is moving up or down. Charts are helping investors to find the stocks they want to purchase and discover which stocks they want to sell.

Chart analysis is based on the theory that prices tend to move in trends. Hence, past price behavior can give a hint to the future direction of the trend.

The purpose of the chart analysis is to recognize and estimate price trends. But most importantly, to give the objective of benefiting from the future movement of prices.

If you can learn to recognize these patterns early they will help you to gain a real competitive advantage in the markets. Stock chart patterns can provide identifying trend reversals and continuations.

What are different chart patterns

Vertical Bar Charts

Vertical chart bar

 

Vertical bar charts are best for comparing data that is grouped by discrete categories. These charts are best when you don’t have too many groups (less than 10 is usually good). Each bar is separated by blank space which indicates that there is no inherent order to your groups.

Stacked Bar Charts

Federal budget chart

Stacked bar charts are a great choice if you not only want to convey the size of a group relative to other groups but also illustrate the parts that make up the whole group.

Horizontal Bar

The horizontal bar chart is similar to a vertical bar chart but is typically used when the number of categories is large ( greater than 10 or so) or you have long labels that you would like to display for each category. It’s much easier to read the labels when they are displayed in the proper orientation.

Pie Charts

chart patterns

Pie charts are easy to read and fun to look at making them a great choice if you want to understand the parts of a whole. It’s a good practice to order the pieces of your pie according to size always ensure the total of all the pieces add up to 100%.

Line Charts

Dow - Jones average trading volume chart

Line charts are used to show resulting data relative to a continuous variable – most commonly time or money. They are great for projections of performance beyond your data. If you plot your sales vs. month on a line chart over the past two years, it is easy for the reader to identify any trends that may be useful as you plan for the upcoming year.

A dual-axis chart allows you to plot data using two y-axes and a shared x-axis. It’s used with three data sets, one of which is based on a continuous set of data and another which is better suited to being grouped by category. This should be used to visualize a correlation or the lack thereof between these three data sets.

Area Charts

Company Revenue Chart patterns

An area chart is similar to a line chart, but the space between the x-axis and the line is filled with a color or pattern. It is useful for showing part-to-whole relations, such as showing individual sales reps’ contribution to total sales for a year. It helps you analyze both overall and individual trend information.

Scatter Plot

Chart patterns - real estate rates

A scatter plot chart will show the relationship between two different variables. Scatter plots are useful for quickly understanding if there is a relationship between to variables. If the data form a band extending from lower left to upper right, they’re most likely a positive correlation between the two variables. If the band runs from the upper left to lower right, a negative correlation is probable. When it is hard to see a pattern, there is probably no correlation.

Bubble Chart

chart patterns - bubble charts

A bubble chart is similar to a scatter plot but you can introduce a third variable to the visualization by having the size of the bubble indicates the value of the three variables. Again, a really good option for understanding relationships between continuous variables.

Funnel Chart

chart patterns

 

Funnel charts are most often used to represent how something moves through different stages in a process. A funnel chart displays values as progressively decreasing proportions amounting to 100 percent in total. Funnel charts start at 100% and end with a lower percentage indicating how something drops out of the process at each step or stage. A very common use of a funnel chart is to track sales conversions in a sales pipeline.

Bullet Chart

chart patterns

Used typically to display performance data relative to a goal. A bullet graph reveals progress toward a goal, compares this to another measure, and provides a context in the form of a rating or performance.

Box Plot

chart patterns

A box plot provides you a quick way to visually summarize your data including average values, variation in the data, and whether outliers are present. Multiple box plots allow easy comparisons between different groups of continuous data.

But, being a trader, you will never use all of them. You will use some of them.

All of the most common patterns and what they mean to you, as a trader, are here.

Keep this and we promise it will be a tremendous help in the coming years. Just having them will help you learn to identify them during live trading.

Quiz yourself about Chart patterns in the following quiz:

 

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