If you have checked out the charts of Penny stocks, you might have noticed random price fluctuations. However, what you may not know is that these price fluctuations lead to the formation of certain patterns in the chart, called stock patterns.
What are Stock Patterns?
On a very basic level, stock patterns are a way of observing a series of price actions that occur during a stock trading period. These patterns can be formed during any time frame – in months, weeks, days, or even within a day.
Interestingly, these stock patterns tend to repeat themselves over and over. Once these patterns reappear, they tend to produce the same outcomes.
The basic concept behind stock patterns is the same for all – be it for regular stocks, penny stocks, Forex, or even commodities. This means that a stock pattern that appears in a currency pair would have the same outcome as the one which appears in a popular stock.
Why Stock Patterns?
In technical analysis, stock patterns is a quite powerful tool. This is because stock patterns help you to look at the big picture and identify the signs of future price movements.
Stock patterns essentially give you a framework for analyzing the battle raging between bulls and bears. These stock patterns can help you determine who is winning – the bulls or the bears. You can then take positions accordingly to maximize your chances of profits.
This means that if you learn to distinguish patterns early on in trading, you will be able to gain a clear advantage over other traders and learn to make profits from upcoming breakouts or reversals.
The Two Types of Stock Patterns
The stock patterns are generally divided into two types. They are reversal stock patterns and continuation stock patterns.
Reversal Pattern: A reversal pattern basically signals that the recent trend will reverse as soon as the stock pattern is completed. This means that if a bearish reversal stock pattern appears during an uptrend, the prevailing bullish trend may reverse to a bearish bias. Similarly, in case a bullish reversal stock pattern appears during a downtrend, the prevailing bearish trend may reverse to a bullish bias.
Continuation Pattern: Upon completion of a continuation pattern, the prevailing trend would continue. This means that if a continuation pattern is completed during an uptrend, the prevailing uptrend would continue. Similarly, if a continuation pattern is completed during a downtrend, the prevailing downtrend would continue.
You can use stock pattern analysis for making both short-term as well as long-term forecasts. Some patterns like inverted head and shoulders pattern could take months to become complete, while some others like bearish engulfing could happen within a day.
Stock patterns are a key part of technical analysis. However, most of the successful traders combine these stock patterns with technical indicators as well as other tools of technical analysis in order to maximize their potential for profit.
If you want to learn more about these topics, the Professional Penny Stock Course provides an in-depth look into all the important aspects of technical analysis, chart patterns, and technical indicators, with clear illustrations of concepts and practical examples of trading.