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Technical analysts believe that stock prices often trade in patterns because the driving force behind stock movement is humans, and humans exhibit the same emotions when it comes to their money: fear and fear. ‘greed.
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These two predictable emotions help create predictable trading patterns that technical analysts attempt to capitalize on.
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Here are seven of the top uptrends that technical analysts use to buy stocks.
One of the main drivers of stock prices is human emotions, particularly fear and greed.
Investors generally experience predictable emotions when a stock’s price rises or falls, and these emotions can lead to trading activity that creates predictable chart patterns.
Technical analysts attempt to take the emotion out of investing by relying solely on patterns found in charts to trade stocks, potentially giving them an advantage over investors who may make trading decisions driven by emotion. fear and greed.
While these trends may be predictable, they are not foolproof. Counterfeits, bull traps, and botched breakdowns occur often and tend to cause traders to exit their positions just before the big move.
This is why discipline is so important in technical analysis.
Having a plan before entering a position can help traders deal with unstable price movements, increasing their chances of following an uptrend and avoiding a downtrend.
A plan before entering a trade includes setting a “stop loss” level where if the stock falls to a certain price level, you automatically sell, take a small loss and move on to the trading opportunity next.
A plan would also include a price target whereby the trader would seek to offload some, if not all, of their position to make a profit.
Here are seven of the main bullish chart patterns that technical analysts use to buy stocks.
1. Double bottom
A double bottom is a bullish reversal pattern that describes the fall, then rebound, then fall, then second bounce of a stock.
A successful double bottom pattern looks like a W.
This pattern generally marks the end of a downtrend and the beginning of an uptrend.
It is generally accepted that the first and second bottoms should be close to each other within a few percent, or even at the same level.
A double bottom typically takes two to three months to form, and the further apart the two bottoms are, the more likely the pattern is to be successful.
2. Ascending Triangle
An ascending triangle is a bullish continuation pattern and one of three triangle patterns used in technical analysis.
The trade setup is usually found in an uptrend, formed when a stock makes higher lows and meets resistance at the same price level.
Ascending support and horizontal resistance finally converge at the breakout level.
This pattern creates a well-defined setup for traders. If the stock breaks above horizontal resistance, traders will buy the stock and set a stop loss order, usually just below the previous resistance level.
But if the stock breaks below the increasing support level, a short trade signal would be generated.
An ascending triangle is a high probability pattern if the breakout occurs on high volume and is more reliable than a symmetrical triangle pattern.
3. Cup and handle
A cup and handle is a bullish pattern that resembles a cup, formed by a basic pattern that generally resembles a “U”, followed by a handle that is formed by a short-term downtrend.
Once a stock exceeds the handle, a technical analyst buys the stock.
A trader could generate a measured price target move by measuring the depth of the cup in the price and add that amount to the cup lid.
This pattern generally extends an uptrend already in place.
A U-shaped cut is more likely than a V-shaped cut, but both can work.
4. Bull Flag
A bull flag pattern occurs when a stock is in a strong uptrend and resembles a flag made up of two main elements: the post and the flag.
This pattern is a bullish continuation pattern. Typically, traders buy the stock after it breaks above the short-term downtrend, or flag.
A measured price target can be obtained by measuring the distance from the pole and adding it to the upper right corner of the flag.
Bull flags are short-term trends that ideally last one to four weeks, usually last no more than eight weeks, and generally follow a strong uptrend.
5. Bull pennant
Similar to a bull flag, a bull pennant is a continuation pattern consisting of a pole and a symmetrical triangle, generally following an upward price trend.
Rather than a period of sideways consolidation in the shape of a rectangle, price consolidates in the shape of a symmetrical triangle, creating a series of higher lows and higher highs.
The stock’s uptrend will likely continue if the stock rises above the pennant.
In the example chart above, an example of a failed outage or bear trap is shown.
Initially, the stock moves below the pennant, signaling a breakout and potential price decline to come.
But then it quickly recovers, rises above the pennant, and the uptrend continues.
A measured movement target can be obtained by measuring the distance from the pole and adding it to the top of the flag triangle.
6. Bullish Engulfing Candle
A candlestick is a chart style that shows the opening price, closing price, intraday high and low of a security.
The “body” is represented by a stock’s opening and closing prices, and the “tails” are represented by the intraday highs and lows.
A bullish engulfing candlestick occurs when the body of a trading session completely engulfs the previous session.
This happens when the day’s open is lower than the day before and its close is higher than the day before.
When the body of a candle “gobbles up” previous trading sessions, it signals that the bulls are beginning to take control of the bears and that a trend reversal is likely.
The more trading sessions swallowed up by a single candlestick, the stronger the signal.
In the chart above, the bullish engulfing candlestick engulfs the previous five trading sessions, signifying the likelihood that stocks are on track to rise.
7. Reversed Head and Shoulders
An inverse head-and-shoulders pattern is a bottoming pattern that often signals a reversal in a stock following a downtrend.
The inverted head and shoulders is related to the bearish head and shoulders pattern, which is a top pattern.
The pattern takes its shape from a series of three backgrounds, with the second background being the deepest.
A neckline represents resistance and is formed by connecting the three recovery peaks associated with the three bottoms.
When the stock breaks above its neckline, it triggers a buy signal for traders, with a stop loss level set near the neckline breakout level.
A measured movement price target can be obtained by measuring the distance from the head to the neckline and adding it to the neckline breakout level.
A right shoulder higher than the left shoulder is a good sign that an inverted head and shoulders pattern will result in a clear breakout and trend reversal.
Read the original article on Business Insider
