Pricing Patterns of Securities

Happy Learning!!

There is always a need for an investor to lookout for a standard pattern which can provide a clue about how the market or security is likely to behave in the near future. With the proper tools in hand, an investor can be empowered to make profitable decisions. There are many price charting patterns that can be made. What is needed is to use the price patterns and make useful interpretations. Some useful price patterns are Channel, Wedge, Head and Shoulders pattern and the gap pattern.

CHANNEL:  A channel is formed by a series of uniformly changing tops and bottoms. These are seen to be identical and constant over time. The important factor is the slope of the channel. A channel that slopes downwards signifies declining prices. A channel that slopes upward signifies rising prices over the course of time. A change in market sentiments is indicated whenever the price breaches the boundary channels.

 

WEDGE:  A successively reducing difference between the tops and bottoms will form a wedge. Therefore the tops and bottoms are seen to be changing in the same direction but at different rates. The slopes therefore take the form of a funnel. As usual, whenever there is a breach in the boundaries, there is an indication of changing market sentiments.

HEAD AND SHOULDERS: An important price pattern, the head and shoulders pattern is like a human form with a large head (hump) in the middle and shoulders at the sides have been formed by buying pressures. At the peak of each of the humps, there is a selling pressure that results in a subsequent decline in prices. An inverted head and shoulder pattern can be expected to be formed in a falling market.

In a head and shoulder price pattern, if and when the price goes below the neckline, then a further drop in the prices is expected. In an inverted head and shoulder pattern, if and when the price cuts the neckline after the second inverted shoulder has formed, it is indicative for of a rise in the price of the stock. There is no definite explanation for the movements for the prices once the neckline has been breached.

 

GAP: The gap gives the difference between the opening price of the trading day and the closing price of the earlier trading day. A wider gap indicates that there is a stronger signal for the continuation of the observed trends. In a rising market, a wider gap indicates the investor’s willingness to pay a higher price to buy the script. In a falling market, a wider gap indicates that there is an extreme selling pressure from the investors and prices may be expected to fall further.

An investor can make use of these handy tools in their research, to help in decision making for buying and selling stocks. Further study can be made by an interested reader by reading books and journals that are specialized in the topic of stock market pricing patterns.