What is Stock Market Pattern Recognition?

What is Stock Market Pattern Recognition

The best way that you can identify a change in the market is to pay attention to the patterns within that market. For this to occur, you need to be familiar with some forms of technical analysis, and how you can draw a significant amount of information from these. This is what stock market pattern recognition fully embodies. Early recognition of these patterns will make it easy for you to identify breakouts as well as reversals in profit.

Stock market pattern recognition is possible through looking at stock chart patterns. These are able to reveal a series of price actions that happen within a chosen stock trading period. The period may vary depending on the analysis that you want to do, and could be intraday, daily, weekly or even monthly. Patterns are called so because of their repetitive nature which traders need to understand so that they can improve their competitive advantage. Here are some patterns that you should know: –

  1. Head and Shoulders – With this pattern, you will be able to see the top as well as the downside of the price target. When you notice this type of formation, you will identify a rise occurring within an uptrend that is existing, moving towards a new high. This is what creates the left shoulder. This is then followed by prices moving lower, and then a rebound to a new high. This is what creates the head. Following this, there will be a decline, although it will not violate the left shoulder. Prices will rise again but will be unable to top the recent high which is what then creates the right shoulder. The neckline is identified when you connect the lows that happened once the head and the left shoulder were formed. The pattern becomes complete when the neckline has been violated and the prices have moved lower.
  2. Pennant – You will be able to identify a pennant once there is a significant movement in the stock, as this is when it is created. Once you notice the movement, there will be a period of consolidation that is what leads to the pennant shape being created. This is formed as there are converging lines. This is followed by a breakout movement that happens in the same direction that there is a big stock move. This type of pattern tends to hold for between one to three weeks.
  3. Gaps – This is a pattern that you will see when the price opens higher or lower than the close of the previous day. When you notice that there is a gap, it means that an essential price level has been set through the new price. When the gap is higher, it is an indication that there is support to enable to stock to gain value and move up, and when the gap is lower, then there is some resistance that has been created which will push down the stock lower. For the most part, a trend will continue in the direction of the gap.
  4. Cup and Handle – The pattern on the chart looks like a cup and handle. The cup has a curved shape with the handle sloping downwards slightly. On observation, the right side of the illustration you see will have a low trading volume. This pattern can last from between seven to sixty-five weeks.

There are so many trading patterns that existing that it would be impossible to capture them all within this list. However, with this list, you can get started with the basics and get started with your successful trading.