Why Chart Patterns Work?

Chart patterns give you buy and sell signals that can make you profits and help you limit your losses in the stock market.  But what makes them work so well?

Chart patterns work because of psychology.  Take the rectangular patterns, this pattern occurs when a stock is bouncing back and forth between 2 levels for a while and then breaks either up or down.

For example let’s say we find stock XYZ has been bouncing between $35 and $45 for 1 month.  Finally it breaks up to $47.  This indicates that the stock has broken out its trading range and will most likely continue to go up. 

When people see this their greed takes over and they buy as much as they possibly can.  This buying forces the stock to go up even higher.  That is the reason that these buy signals work so well. 

In addition they also offer great trading signals because.

1.       They let you know when you are wrong.

If you buy a random stock hoping it will go up you will not know if you are right or wrong until you either make money or the stock goes down to $0.  This could take years and give you a headache.

However with chart patterns you can figure out if you are wrong easy and fast.  If the stock breaks back below $45 and continues in its old range we could assume that we were wrong and decide to exit for a small loss.

2.       They give you targets

Another great thing about chart patterns is the fact that they actually give you targets to shoot for, this gives you a basic strategy on when to get out.  That way you do not end up giving back your profits if the stock turns against you.

3.       They give you buy signals

If you can find a breakout you can find a buy signal.  This stops you from having to guess the best time to enter a stock, because the chart tells you.

For more on chart patterns visit http://www.stocks-simplified.com/chart_patterns.html