Stock markets have always been a fascinating realm for finance professionals. How stock prices move, how trading happens and how investors' fortunes change have made them a really interesting phenomenon.
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.
In this article, I would like to discuss on two important chart patterns which analysts use to predict trend of price movement in a stock.
1. Double Top chart pattern: As the name suggest, this pattern is characterized by two peak (top) prices after which the prices tend to fall. It resembles the letter 'M'.
The double-top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower. The first stage of this pattern is the creation of a new high during the upward trend, which, after peaking, faces resistance and sells off to a level of support. The next stage of this pattern will see the price start to move back towards the level of resistance found in the previous run-up, which again sells off back to the support level. The pattern is completed when the security falls below the support level that had backstopped each move the security made, thus marking the beginnings of a downward trend.
This pattern is a clear illustration of a battle between buyers and sellers. The buyers are attempting to push the security but are facing resistance, which prevents the continuation of the upward trend. After this goes on a couple of times, the buyers in the market start to give up or dry up, and the sellers start to take a stranglehold of the security, sending it down into a new downtrend.
2. Double bottom pattern: This is just the opposite of the Double Top chart pattern. It resembles the letter 'W'.
A double bottom chart pattern is a chart pattern used in technical stock analysis to describe the fall in price of a stock or index, followed by a rebound, then another drop to a level that's roughly similar to the original drop, and finally another rebound. The pattern is confirmed when the price moves above the resistance the security faced on the prior move up. The double bottom can be a fast moving pattern so traders would want to see price rally after a few bars.
These patterns are closely watched by analysts as well as investors to identify opportunities to invest in stocks to maximise their profits. It shows the sentiments of buyers and sellers on a particular stock which act as cues to take short term calls. Moreover these trends also act as indicators of future price fluctuation in stock prices. Therefore, it is always wiser to watch out for patterns in stock price movements to ensure that you are making it big in the 'lucrative' world of stock markets !!
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