Recognizing Chart Patterns: A Guide to Spotting Price Trends

by Wayne A. Thorp, CFA

Recognizing Chart Patterns: A Guide To Spotting Price Trends Splash image

Most of us have heard the phrase “every picture tells a story.” In the context of investing, the same applies to the use of price charts. A price chart tells a story about how a particular security is acting, whether a stock, mutual fund, or a futures contract. If a security has been trending downward, the consensus of the market is negative; a rising price indicates that the market has a positive view of the security.

Technical analysis is based on the theory that the price movement of a security captures all relevant information. From the viewpoint of technical analysis, the study of fundamental data may miss one essential variable that will lead to an inaccurate conclusion and, therefore, result in incorrect investment decisions. In addition, supporters of technical analysis argue that the data does not always paint an accurate picture of the company’s performance because management can manipulate the figures. Some investors, however, select stocks using fundamental analysis, but time transactions using technical analysis.

Charts are invaluable resources for technical analysts, who use them to help identify developing trends in the price movements of a security. This article is an introduction to several charting formations that you can use as part of your investment strategy.

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Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @AAII_CI.


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