Welcome to Chart Formations

Forex trading, stocks trading, index futures, commodities, cryptocurrencies, and any other type of equity trading offers the great possibility of financial freedom, but it is also fraught with danger. The oft quoted statistic that 95% of all new 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 fully prepared and with no illusions. Yes, there is money to be made; but equally, there is money to be lost! Therefore, you need to be fully aware of what is required to trade equities successfully.

There are three essential qualities any trader entering the market requires if they ever 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, not only towards your losses, but also towards your winnings.
  • Trading Method

    A holistic trading method is not just a trading system based to fundamental or technical analysis, but also encompasses proper money management based upon risk and reward, and your emotional response to market conditions and trading activities.

This is where Chart Formations comes in. Whether you are, or aspire to become a day trader, a position trader, a scalp trader, or an investor, Chart Formations is your on-line stock trading resource that is dedicated to providing reliable information to assist you, our user to trade the stock market more successfully, from the perspective of technical analysis. As such, we discuss information related to stock charts, technical indicators, technical analysis, and common stock chart patterns, including candlestick patterns, all explained with examples. The ultimate aim is to assist you in creating their own high probability, stock trading strategies, regardless of whether they are trading forex, cryptocurrencies, commodities, or stocks. But our approach is more holistic as we focus not just on technical analysis but also on money management and trader psychology in an ever changing market environment.

What is Technical Analysis?

Technical Analysis

Technical Analysis

In its simplest sense, technical analysis assumes that the price movement of a security is not totally random and it is therefore possible to try and predict where the price movement is likely to go in the near future. As such, 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. It uses a security's historical price, namely its open, close, high and low prices, as well as its volume data to construct stock charts to determine in which direction the security is more likely to move in the near future, based on its past price data.

In other words, technical analysis is used to increase the probability of correctly predicting where the market would go in the near future; in so doing, increasing the probability of successfully trading the market. However, technical analysis does not provide absolute predictions; it provides probable predictions. Therefore, technical analysis should be used along with proper money management.

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 typical chart patterns, such as the triple top chart pattern and the triangle chart pattern, that reoccur repeatedly as the chart develops.

What are Stock Charts?

A Stock Chart

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 for a given time frame. The opening price, the closing price and the direction of the price movement are all ...

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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 or mean reversion. It is possible to reap the benefits of both types of systems by ...

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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.

Wealth Warning

Trading equities, options, derivatives, currencies and cryptocurrencies, commodities or any other financial security can offer significant returns BUT it 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, proper risk analysis, and a defined 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 a trader's 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 misconstrued as a guarantee of future success!