Chart Patterns Lead To Breakouts
Chart patterns are the key to finding the breakout which lead to big stock trends. The “breakout” from a chart pattern signals the beginning of trend that could develop in to very large profits. Before a stock breaks out into new highs, IT FORMS A PATTERN. The goal is to capture a major trend. These chart patterns signal when a stock is about to make a major move. Before every major move in a stock, there is a period of consolidation in the price action of the stock. This can be referred as a resting period or pause. It is at this time, when you should pay attention to the stock. The moment that the price breaks out of the pattern is the signal to trade. Most traders are familiar with a few chart patterns. It is essential to understand WHEN AND WHERE TO ENTER THE TRADE when learning stock trading. Chart patterns are the most common starting point in trader education. Chart patterns are a form of technical analysis and can be found in short or longer time frames.
Below are the the Best Chart Patterns to Trade
The chart patterns listed below are very rare occurrences, but produce some of the largest stock trends. Most of the stocks that produce these chart patterns end up being the hottest stocks in a bull market cycle. There are hundreds of chart patterns out there. The following patterns here are classified as Class 1 chart patterns and are known to produce some of the largest gains. When trading breakouts in the stock market look for chart patterns. Breakout theory’s trading system relies highly on these chart patterns.
Cup and Handle
This chart pattern is called the cup and handle because of it’s shape. The cup can be described as a U or a curved bottom. The handle is an area that forms from a period of lower or declining volatility. Usually the handle is a period of consolidations accompanied by lower volume and volatility. In he handle you can also find chart patterns.
It is important to note that some cups can range from periods of 3 months and sometimes as long as 9 months. For our purposes. We will mostly be looking for cups that range between 3-6 months in duration.
As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks… then it takes off. Below is an example of a cup and handle chart pattern on the Stock ARO:
The Breakout Price would not be $24 zone in the chart above. The breakout price is a new high price. This is the point of entry. It is at this point we should make our entry as large trends tend to begin from this point forward. At or above $24 we buy.
Double bottom chart patterns happens by way of the two distinct low points in the price action. It resembles the two sharp points like a “W”. The two low points are approximately within the same price. This is a powerful pattern because it often identifies a turning point in a market that was in a downtrend that is now turning to an uptrend. These chart patterns can also be seen at the end of a market crash. By identifying this pattern in stocks as well as in the stock market indexes, you can take advantage of turning points. Most of the money in Bull markets are made at he beginning of the bull market. It is wise to manually scan your charts every week to make sure you aren’t missing any important chart patterns.
Important Note: This is a sloppy double-bottom. Reason this is posted this is because, according to “textbook” definition of technical analysis the two bottoms should have the SAME price. This is the fallacy of most technical analysts. Many hardcore technical analysts will tell you that patterns must meet “specific characteristics”. THIS IS WRONG. There is no exact criteria. What’s important here is the breakout price. Can you spot it? Some say it the high price defined in the middle of the “W” around $32. Others would say because that candle has the tail that is too long, we would consider the breakout price around $28. Both answers are correct. You would enter your trade when the price action trades above the breakout price. Either way, you would have made money. This stock continued into one of the largest trends in 2009-2010. You would have lost money and not taken this trade had you been looking for EXACT CHARACTERISTICS.
REMEMBER: Technical Analysis is NOT an exact science. Stop treating it as such. It will not guarantee a breakout will follow through into a big trend. Technical analysis is here to identify points of entry for lowest risk. The REAL SECRET making money trading stocks, commodities, forex etc. is the RISK MANAGEMENT STRATEGY. We will discuss risk later in another tutorial.
Below is an example of a Triple bottom pattern note the three V’s. This is another powerful pattern that I like to watch for. Notice price action as well, the green candles are larger and longer than most of the red candles. The price action has a bullish tendency. Some times a handle may form before breaking into new highs, in the most powerful of stock trends, there will be no handle. The breakout price would be the highest price of $42.50. As soon as the price crosses you will execute a buy order, in order to catch a possible major trend.
These are the some of the most common price patterns, I like to use. There are many patterns but the key point here is the stock is breaking in to ALL TIME HIGHS. It sounds crazy, but it works. It turns out that the examples above produced some of the most profitable trades, gains running into the triple digits.
Chart Patterns Breakout into Large Trends
Another Huge Trend into new highs from a breakout
Breakouts happening on long term and short term strategies
Keep in Mind: These gains are achieved with out using margin, pyramiding (buying more shares on mini breakouts), or the use of options in trading. Some traders who have used leverage, and options, have reported gains in excess of 1000% or more. We will discuss the proper use of margin leverage and options in an advanced tutorial.
RECAP: Learn to recognize Chart patterns. These are some of my favorites. There are hundreds of chart patterns in the market and it would be in your best interest to know them. Discussing them here would take hundred of pages and would be redundant. It is your duty to study up on other chart patters.