Welcome to Chart Formations

Forex trading, stocks trading, index futures, commodities, and any other type of equity trading offers the great possibility of financial freedom, but is fraught with danger. The oft quoted statistic that 95% for all traders fail in the market is something anyone entering the market has to take heed of and prepare themselves so that they enter the market prepared and no illusions. There is money to be made, but equally, there is also money to be lost! Therefore, you need to consider what is needed to trade equities successfully.

There are three essential qualities anyone entering the market required if they hope to be successful. These are:

  • Expendable capital

    Capital or money is the obvious requirement but note that we are not just talking about capital here, but expendable capital. This is because your dependence on that capital is important as it often places constraints on and impedes proper money management and often dictates your emotional response to trading.
  • Psychology

    Trading often has a major psychological aspect in terms of emotional response to not only losses, but also winnings.
  • Trading Method

    A holistic trading method is not just a trading system based to fundamental or technical analysis, but also encompasses money management and emotional response to the market.

This is where Chart Formations comes in. Chart Formations is an online stock trading resource that is dedicated to providing reliable information to assist users to trade the stock market, from the perspective of technical analysis. As such, we discuss information related to stock charts, technical indicators and technical analysis. The ultimate aim is to assist users in creating their own high probability, stock trading strategies. But our approach is more holistic as we focus not just on technical analysis but also on money management and psychology in the market environment.

Our site is continually growing as we add more articles and information so check back often and do send us your feedback so we can improve Chart Formations even further.


What are Stock Charts?

Stock charts are the foundation of technical analysis. They are a graphical representation of the historical price movement of a security, and make the recognition of chart patterns possible. There are different types of charts that can be used in technical analysis. These include the popular bar charts and candlestick charts, as well as line charts and point and figure charts. With the exception of point and figure charts, which only plots a price change when a new high or low is made, all charts plot price action for a specific duration of time, which is called the time-frame. Each type of chart plots price action differently, and displays different information about the price action in a given period of ...


Trading Systems

There are different types of trading systems but all systems must have three key elements: they must have some level of probability, or a degree of success, they must have a good risk/reward ratio for each trade, and they must be based on a clear and objective set of rules. The risk/reward ratio is quite important as a risk/reward of 1:3 mean that a system can have a success rate of less than 33% and still make a profit, although it might not be a viable system. A risk/reward ratio of 1:3 means that you can be stopped out on three out of four trades but if the fourth trade is successful, you will still break even, as long as you follow the system's rules.

Most trading systems are either trend following systems or mean reversion systems, which are also called contrarian systems. Trend following and mean reversion systems are not diabolically opposed. It is therefore possible to combine elements of both ...


Wealth Warning

Trading equities, options, derivatives, currencies, commodities or any other financial security can offer significant returns BUT can also result in significant losses if the market moves against your position. It requires a strong commitment to skill development, knowledge acquisition, and emotional control. It should be treated as a business with a clear business plan, a risk analysis, and set of attainable goals. The risk associated with trading the vagaries of the stock markets is probably the most important consideration as it has a profound effect on emotional control. You should not trade the stock markets with money you cannot afford to lose as there is considerable exposure to risk in any stock market transaction.

Furthermore, the past success of any trading method, strategy, or system is only indicative of future success. Under no circumstances should past success be construed as a guarantee of future success!


TODAY'S INDICATORS

Stochastic Oscillator

Stochastic Oscillator
Stochastic Oscillator

The Stochastic Oscillator is a leading momentum indicator that was developed by George Lane. It consists of two lines – the %K and the %D – which fluctuate between 0 and 100. The %K line represents the change in closing price with respect to the high and low of the specified period while the %D line is the average of the fast %K over another period.

The Stochastic Oscillator is used to determine when closing prices cluster together in the retraction of a developed trend and indicates potential entry and exit points when the %K line crosses the slow moving ...


On Balance Volume (OBV)

OBV
On Balance Volume

On Balance Volume (OBV) is a market strength indicator developed by Joe Granville to determine positive and negative volume flow for a given security by comparing volume to price movements. It is a simple indicator that adds a time-frame's volume when the closing price is up and subtracts the time-frame's volume when the closing price is down. OBV is a running cumulative total of this volume.

If the closing price is higher than the previous closing price, then the new OBV is calculated using the formula: OBV = current Volume. Otherwise the new ...


TODAY'S CHART PATTERNS

Harami Pattern

Bullish Harami Pattern
Bullish Harami Pattern

'Harami' is an old Japanese word that means pregnant and describes this pattern quite well. The harami pattern consists of two candlesticks with the first candlestick being the mother that completely encloses the second, smaller candlestick. It is a reversal candlestick pattern that can appear in either an uptrend or a downtrend. When the second candlestick is a doji, the pattern is called a harami cross and is more significant than the normal harami pattern as the doji's lack of a real body indicates great indecision and uncertainty.

When the harami pattern is ...


Hanging Man / Hammer

Hammer Pattern
Hammer Candlestick

The Hanging Man and Hammer candlestick patterns are related trend reversal patterns that may appear at the end of an uptend or downtrend respectively. This is a single candlestick pattern that with a short real body, little or no upper shadow and a long lower shadow that must be at least twice as long as length of the real body. The color of the candle is not import, only its location in the current trend.

The Hammer pattern is called a takuri in Japanese, which means testing the water for its depth. This is the bullish version of the pattern. A bearish ...


What is Technical Analysis?

In its simplest sense, technical analysis makes use of stock charts to study the past movement of prices in an attempt to anticipate the probable future movement of that security's price. In other words, technical analysis uses a security's historical price, namely its open, close, high and low prices, as well as its volume data to construct stock chart to determine which direction the security should take, based on its past data.

Some forms of technical analysis augment the price chart by constructing technical indicators and oscillators that are based on the security's past price data. These indicators and oscillators are interpreted and used to develop trading systems. Other forms of technical analysis are based on identifying archetypical chart patterns, such as the head and shoulders (H&S) pattern and double top reversal patterns, that reoccur repeatedly as the chart develops.


TRADING TIPS

  • Always back test your trading strategy or plan on the security or option that you intend trading.
  • Always test a new trading system and a variation of a system on a demo account or by paper trading before implementing the system.
  • No trading system is 100% accurate so always use stop losses to minimize any loss.
  • Always wait for the close of your time frame before committing to a trade. Never anticipate where the close will be. Always wait for confirmation of a close.
  • Always implement good money management. Never risk too much of your capital on one trade or too much of your capital at the same time. It is far better to conserve your capital and wait for another set-up than it is to ride a loser and sweat it out.
  • Never panic. Plan your trade carefully and trade to your plan.
  • Ensure that your trading plan includes a profit taking strategy. It is no good watching your profits turn into a loss because your plan did not include an exit strategy.

Recommended Reading: