Technical analysis charts are widely used in trading financial markets whether it be stocks, currencies, commodities or bonds. Traders interpret charts and look for chart patterns in order to make trading decisions.
An interesting question to ask is why? Surely the value of any financial instrument is based on fundamental factors like supply and demand. How could a chart help in forecasting future market movements?
Technical analysis and the interpretation of charts has been around a long time. Candlestick charting was used to track the price of rice for hundreds of years in Japan. It is said that Munehisa Homna (1724-1803), a legendary Japanese rice trader, became very wealthy using trading strategies based on the use of candlestick charts. The analysis of charts grew in the United States in the early part of the 20th century through pioneers such as Charles Dow, R.N. Elliott, W.D. Gann and others.
The pioneeers discovered market behaviour that tends to repeat by analyzing the price action in financial markets and the study continues today. Now with the use of computers it is much easier to interpret charts and chart patterns over any time period whether that be years or seconds.
Although some fundamental analysts were/are skeptical about the use of charts the fact is that this knowledge has filtered through the trading community and is now widely used in the financial community. There is little point in joining the debate about whether a given chart pattern is based on reality or whether it becomes self-reinforcing as more and more traders recognise the patterns. If it works and you make money out of it thats good enough.
While it is helpful to know about these trading set ups remember that just because a pattern is manifesting in the market it is no guarantee that the predicted outcome will follow. As always, risk management is key.
Below is a list of popular chart types, patterns and interpretations of price action. Click on them for more information.