Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
July 19, 2018 - The RightLine Report
Notes From The Editor
One of the most fascinating aspects of the human mind is the ability to find order in what appears to be chaos. Everyday life is full of these experiences - whether it's gazing at clouds and picking out shapes of animals, hearing organized melodies and beats in frantic music, or noticing patterns in the floor tile.
The other day I found myself absently-mindedly gazing at my desktop. The randomly arranged icons on the screen suddenly took on an eye-pleasing geometric aesthetic. It's amazing what the brain can do when it's left to its own devices.
Pattern recognition, of course, is what technical analysis is all about. Nothing seems more chaotic than stock prices, which zip up and down and change direction without notice. Attempting to buy a stock for a profitable short-term trade would be a crap shoot without the ability to detect and use patterns. While prior price action is no guarantee of future movement, it does have predictive quality that can boost your odds of a successful trade.
Imagine a stock that's rebounded from its 200 DMA - Daily Moving Average - during the past month. A subsequent reversal would provide an entry point with better than 50/50 odds for success. Applied consistently, those improved odds translate to long-term profits.
Why do chart patterns work? Mass psychological plays the biggest role. When thousands of market participants are anticipating a reversal or bounce from a certain level, it creates a sort of self-fulfilling prophecy. Supply and demand is a major factor as well - particularly on breakouts and breakdowns, when a stock moves into a price vacuum.
Active traders often come across patterns in the course of their everyday market-watching. Individual equities can develop intra-day trends - finishing strong after a weak open, rising during the lunch hour, and so on. The first instinct when you discover a pattern is to trade it. Before committing any money, however, note how often that pattern fails to produce results. It may even be a good idea to paper trade it for a day or two before putting your money down. And as always, use risk management when taking a position.
Also bear in mind that in this ever-changing market, patterns can suddenly cease to produce results. When this happens simply walk away and shift your attention to other stocks. With such a vast market universe, high-odds entry points present themselves on a daily basis.
Here's to profits!
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