Skills In Technical Analysis – Introduction To Pattern Analysis For Beginners
Pattern analysis is the interpretation of charts and patterns. Chart reading and pattern analysis are not a mere memorizing of patterns and recalling interpretations. Any chart is a combination of differing, various and diverse patterns and thus an accurate analysis of a chart relies on consistent pattern study, experience, and personal knowledge, both technical and fundamental, and the ability to evaluate differing, opposing indicators, to appraise patterns in view of diverse, composite, and sometimes differing details as well as recognising patterns in charts using fixed, memorized formulae, in some cases.
What are the reasons why market participants trade in the market? Knowing reasons for such behaviour might help us in pattern analysis. There are thousands, sometimes even hundreds of thousands, of diverse and differing market participants in the stock market, at any point, selling and buying securities for many differing, diverse reasons and possessing various motives and from various financial positions: for example, a spectrum might have some love of return or love of gain, or optimism, or hedging with stop loss triggers, with price target triggers, using either fundamental analysis or technical analysis, using broker recommendations, and such behaviour. Trying to figure out why market participants are buying and selling can be very daunting and challenging. Chart patterns place buying and selling into perspective by consolidating supply and demand into a concise picture. As a complete and visual record of trading, patterns in charts provide a framework to analyse stock market ups and downs: Chart patterns can help us analyse the big picture.
Pattern analysis, thus, can be used to make short or long term forecasts about prices. There are various data types and kinds that can be used. The data can be intraday, daily, weekly or even monthly, and patterns can be as short as one day or as long as many, many years. There are many interpretations of both the long and the short term. Yet, it should be noted, technical analysis can be science and also art. In addition, pattern recognition can be open to personal, biased interpretation and is thus subject to personal bias. To defend ourselves against bias and to confirm actual and proper pattern interpretations, other skills of technical analysis should be used to verify or refute conclusions based upon pattern analysis. While price patterns may seem similar, in reality, no two patterns are alike. False breakouts and exceptions are real. Hence, consistent and constant study is required for successful pattern analysis.
It is also rather important to know that prices trend, and that pattern history repeats itself. An uptrend indicates that demand is in control, and a downtrend indicates that supply is in control. As the balance between supply and demand shifts, a pattern emerges. The vast majority of patterns in charts fall into two main groups: either a reversal or continuation trend. Reversal patterns indicate a change of trend. Continuation patterns indicate a pause and indicate that the previous direction will resume after a while. However, just because a pattern forms after an advance or decline does not mean of necessity that it is a reversal pattern. Much relies on prior price actions, volume, and others, as the pattern evolves. This is where technical analysis stops being a science, but also becomes an art, or an art form.
To conclude: pattern analysis is the reading of charts, but is not as simple as a mere reading. The motives that actuate people are all part of patterns, and thus discerning charts and patterns requires insight into behaviour by market participants. Yet, pattern recognition is not a science, but an art sometimes; analysis is always hard to do accurately. Hence, to give suggestions, the keys to successful pattern analysis are dedication, a persistent dedication to learn, a focus by limiting charts and methods to those known extremely well, and consistency in one’s work ethic with regards stock charts, where one should maintain many charts regularly and study the key and recurring patterns contained in them often. Technical analysis is technical, after all.
