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What Is the Role of Chart Patterns in Technical Analysis?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 29 August 2016
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The role of chart patterns in technical analysis is important for investors looking to capitalize on a stock’s price movements. The different chart patterns are what make the roles of charts key in this analytical process. A few common types include head and shoulders, cup and handle, and triangles. Each one provides different information on the movement of a stock’s price, which can lead to financial gains if investors purchase stock at the right time. In most cases, the role of chart patterns in technical analysis is the best tool for charting stock price movements.

A head and shoulders chart pattern typically has a single peak between two slightly lower peaks. The lower peaks are on either side of the single peak. This chart can indicate both potential stock price increases and decreases, depending on which way the chart lies on paper. Peaks pointing downward are known as head and shoulders bottom; the peak on the right will continue to rise at some point, indicating potential price increases. On a normal head and shoulders chart, the furthest right peak edge will continue downward, indicating financial gains when shorting stocks.

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Cup and handle charts represent bullish patterns in a stock. The role of chart patterns in technical analysis here is to define when an upward trend is about to occur, signaling potential gains in the near future. Cup and handle charts have two peaks with a semicircle on the downside between the two peaks. On the far right upward peak, a small downward trend exists, making up the "handle” in the chart. A short, paused upward trend should be present at the handle’s end, which signals a new potential rise in the stock price.

Triangles are among the most commonly seen charts in stock trading. Investors look to define a resistance point, a place on the chart where at least three peaks do not go below. These three points can be either a price floor or price ceiling. Investors then identify if the price trends slant upward or downward, signaling a potential breakout in an upward or downward price movement. Depending on the movement, investors can either go short or long on the stock in hopes of financial gains.

Other charts certainly exist in technical analysis. The role of chart patterns in technical analysis present different signals to investors. Research is necessary to determine what each chart means. From here, investors need to compare the chart to standard examples and make a decision. Constant analysis is necessary to ensure the investor makes money from the proper stock price movements.

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