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!


Commodity Channel Index (CCI)

Commodity Channel Index
Commodity Channel Index

The Commodity Channel Index (CCI) is a leading cycle indicator developed by Donald Lambert to identify the cyclical movement of commodities but it can also be used for stock, forex, futures and other securities. The CCI compares the typical price of a security to its simple moving average (SMA) and plots the result as an oscillating percentage.

Lambert recommended that a third of a complete cycle be used as the period for the CCI. Thus, if the cycle takes 60 periods to complete, then a 20-period CCI would be recommended. Once you have determined the period ...

Moving Average Convergence/Divergence


The Moving Average Convergence/Divergence (MACD) is an indicator that was developed by Gerald Appel in the 1970s. The difference between two exponential moving averages (EMAs) is used to calculate the MACD and then a signal line, which is an EMA of the MACD is drawn.

The MACD is both a trend indicator as it uses trend indicating EMAs and a momentum indicator. However, the MACD and its EMA can be plotted as two lines that fluctuates above and below a zero line, or as a MACD histogram indicating the distance between the two EMAs. The ...


Trend Lines

Trend Lines
Trend lines

Trend lines play an important role in identifying chart patterns as they draw the chartist's attention significant price levels. Trend lines are relatively easy to draw. In an uptrend, which is characterized by higher highs and lower lows, a support trend line is drawn below two or more correction lows. If the trend line connects only two correction lows, it is a tentative trend line and is only confirmed when the price touches the line for a third time without breaking that line.

When a trend line has been identified, it can used to identify areas of potential support or ...

Double Tops

Double Tops Pattern
Double Tops

The Double Tops patterns appear at the end of an uptrend when the price reaches the previous resistance level but fails to break through the resistance. The result is two price peaks with the same high. The entry point in this pattern is when the price moves below the minor low between the two peaks. This will result in a lower low and the start of a downtrend.

The Double Top pattern is confirmed when the support at the bottom of the recent low is broken and indicates an intermediate to long-term change of the ...

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.


  • 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.

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