5 Stock Trading Patterns to Understand Vital Signs and Make Decisions
When you understand stock trading patterns, it helps make the decision-making process easier and less ambiguous. Here’s demystifying some important patterns.
Online stock brokers are partly responsible for the rising popularity of stock trading. Direct access trading platforms also do their part in encouraging the public to trade.
Figuring out Technical Trading Patterns
One of the key aspects of successful stock trading is understanding patterns. And that can be confusing for the uninitiated. The reason why observing these patternsis important is because it is often confusing to know when the right time is to buy into an investment or when it is time to get out of it. Rules may not work all the time, and there could be situations when even tried and tested strategies don’t work. That does present a risk, and could even lead to some losses for investors and traders.
But there are some that look to identify situations when a stock is about to fall or rise before it actually happens. They say they’re able to identify these patterns through technical trading, a process by which they use stock charts to detect certain basic patterns that could predict such situations. These patterns have their drawbacks though, in that their calculations don’t factor in the actual companies. But the active trader can benefit from the additional tools technical trading provides.
Trading Patterns to Watch Out For
Now let’s look at some of these patterns which tell us when the right time is to buy a particular stock or when the time is to sell it:
· Support and Resistance Levels
If a stock reaches a support level, it is understood to be the time to buy. This is when the price of the stock falls significantly enough so that it becomes an irresistible bargain.
The opposite of this is a stock reaching a resistance level, which is considered to be the time to sell. It’s when the price of the stock you hold is rising to such a level where other investors believe it to be inflated. That’s because beyond this point there wouldn’t be anyone around to buy it because the price for that stock is perceived to be way too high.
· Double Bottom & Double Top
A chart pattern indicating “double bottom” is where the price of a stock has dropped to the above-mentioned support level, but recovered and then started falling again and yet again recovered from the support in quite a short period of time.This cycle that repeated itself twice could indicate a particularly strong support level for the stock. That would mean the stocks are about to begin a solid run. The stock could then be considered as a low-risk option to buy.
The opposite of the double bottom is the “double top”. This is when the stock climbs to a certain price but then gets beaten down again twice. That could be an indication for traders to stay away from the stock since its potential for losses is greater than its potential for gain. A double top position is a significant dampener on investor enthusiasm.
· Relative Strength Index
The Relative Strength Index (RSI) is an important metric that gives an idea of the momentum behind a stock at a point of time. Here, market sentiment comes to play. The sentiment, whether positive or negative, building around a stock could cause the price to be pushed past a sensible point. That could lead to the fortunes being reversed.
The RSI calculation basically involves taking the past 14 trading days’ average figures of gains and losses, which produces a number anywhere from 1 to 100. A dip below 30 of the RSI is considered an undersold position, which means the stock could soon bounce back since its downswing has gone a bit too far. If a stock faces declines continuously, investors could have a bit of sympathy for the stock and feel it isn’t being treated fairly. That could make the stock rise. On the contrary, too much interest in a stock could make traders think that the stock is overbought, or undeserving of all the enthusiasm shown towards it. That would make the stock ripe for a fall. An RSI figure of 70 or above is considered an overbought situation and therefore ripe for a decline.
· Golden Cross & Death Cross
Now let’s check out a “golden cross” situation. For this, we need a stock’s “moving average” which is the share price average in the past trading days. It could be the past 20, 50 or 200 trading days. That can help smoothen the day-to-day ups and downs of the stock and provide you with an outlook of the longer term. Shorter-term moving averages getting past the longer-term ones is an important indicator and helps analyze whether the recent performance of a stock is better than what has been seen in the longer term. That could indicate that this is a stock that is potentially on the rise.The golden cross is when the short-term moving average, let’s say the 50-day average, crosses the long term average, which is the 200-day average. That is considered the time to buy.
The opposite of this is the “death cross”. This is when the 50-day moving average gets lower than the figure for the 200-day moving average. Usually, death crosses in major stock indexes are indicative of an upcoming bear market.
· Analyst Sentiment
Something very important to remember and take into consideration is the analyst sentiment. Analysts study markets in-depth and can give you a clearer perspective on stocks. Analysts can be wrong, and there can be times when they don’t agree too. However, they usually have a clear picture of what’s going on and there is normally a consensus among the analysts about the worth of a stock.
If analysts believe a stock has much more value than the price at which it is currently selling, then it is an indication to buy. The opposite of this is when analysts believe a stock is overpriced. They could also feel that though the stock is selling high, the company it represents is underperforming. That’s an indication to sell the stock.
So we’ve covered some of the major indicators you can use to make some trading decisions. Now you are much better prepared for online trading.
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