How chart patterns work

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Chart patterns are formed by the price movements of a security or an asset over a period of time. These patterns can give investors insight into future price movements and help identify potential buy or sell signals.

There are several types of chart patterns, including reversal patterns and continuation patterns. Reversal patterns signal a potential change in trend, while continuation patterns suggest that the trend will continue in the same direction.

To recognize chart patterns, investors should be familiar with the different shapes and formations that they can take. For example, a head and shoulders pattern is a reversal pattern that forms when the price of an asset makes three peaks, with the middle peak being the highest. The pattern looks like a head and shoulders, hence the name.

Other common chart patterns include double tops and bottoms, ascending and descending triangles, and flag and pennant patterns.

When analyzing chart patterns, investors will typically look for confirmation of the pattern before taking action. This can involve waiting for the price to break through a key level of support or resistance, or waiting for other indicators to signal a buy or sell signal.

It's important to note that chart patterns are not always reliable, and investors should not rely solely on them when making investment decisions. It's also important to consider other factors such as fundamental analysis and market conditions before making any investment decisions.

On my website you can find a detailed explanation of most relevant chart patterns you will need in a technical analysis.