Charts Reveal Emotions Driving Markets

2020-04-24 | Simpler Trading Team

Part of the allure of trading is searching for the next profitable moves in the stock market.

Chart patterns are a powerful and consistent source of identifying those moves. They form an important base in every successful trader’s plan to develop trade setups.

But first, we must ask ourselves, why are chart patterns important to know?

The main reason is that the stock market, like history, repeats itself over and over again.

A chart pattern is like a measurement of human emotions: fear, greed, worry, joy. Emotions are translated into a visual image through charts. It’s an ever-changing graphic of colors, dots, and lines on a computer screen.

Traders have heard of the many chart patterns. Here are some:

  • Triangles
  • Channels
  • Topping Patterns
  • Cup and Handle
  • Pennants
  • Wedges
  • Head & Shoulders

These “emotional patterns” track market movement and direction – either the continuation of the current trend, or the end of the current trend and the start of a reversal. This change in momentum is key to trading, and charts offer insight as the market changes.

The frustration with chart patterns comes with the realization that it is not an exact science. In fact, it’s often viewed as more of an art form than a science.

However, once the basics of charting are understood, chart patterns can deliver key signals about the market movement and direction.

These can provide a heads-up if the trend is likely to continue or if a reversal is on the horizon.

Chart patterns also can reveal how the fear/greed cycle of human emotions affect the markets. Fear and greed of traders, especially those panicking over significant real-life events, can move markets.

Chart patterns don’t form all the time – but when they do, they are very powerful. The key is to not get overwhelmed – you don’t need to know every nuance of all of them. Learn the importance and characteristics of the most dominant patterns, and of course, understand how to use them.

Adding more depth in your knowledge of chart patterns and including them in your trading plan helps you follow the emotions of the market. That’s a strong skill to develop in the current volatile market with movement and direction never seen before.

We Saw: markets fighting move to the downside — 

  • Oil stumble, but up 50% on the week
  • Facebook new video hosting attacking Zoom
  • Conflicting news of coronavirus treatments

We’re Watching: … for the market to get “real” —

  • Can the Fed prop up the markets forever?
  • Cash position, preparing for next week.
  • Reasons why internals conflict with market moves.

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