Patterns - PATTERNS Overview A basic principle of technical...

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PATTERNS Overview A basic principle of technical analysis is that security prices move in trends. We also know that trends do not last forever. They eventually change direction and when they do, they rarely do so on a dime. Instead, prices typically decelerate, pause, and then reverse. These phases occur as investors form new expectations and by doing so, shift the security's supply/demand lines. The changing of expectations often causes price patterns to emerge. Although no two markets are identical, their price patterns are often very similar. Predictable price behavior often follows these price patterns. Chart patterns can last from a few days to many months or even years. Generally speaking, the longer a pattern takes to form, the more dramatic the ensuing price move. Interpretation The following sections explain some of the more common price patterns. For more information on chart patterns, I suggest the book, Technical Analysis of Stock Trends by Robert Edwards and John Magee. Head-and-Shoulders The Head-and-Shoulders price pattern is the most reliable and well-known chart pattern. It gets its name from the resemblance of a head with two shoulders on either side. The reason this reversal pattern is so common is due to the manner in which trends typically reverse.
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