Candlestick pattern, trendline: Charting tools you can use to your advantage

In trading, timing is everything. This is one thing savvy traders who buy and sell stocks based on technical chart patterns swear by. While most market pundits and investors give out tips on what and when to buy, the ‘sell calls’ are often missed. Both the components – the time to buy and time to exit a position - are significant and have a bearing on the money / return you make.

Avdhut Bagkar, Business Standard
27th December

There are two ways to identify stocks showing a weak trend. One is on the price itself and other on oscillators or momentum. The price-based study involves several chart formations, including Head and Shoulder, Double Top, Rising Channel Breakdown, Triangles and Rounding Top.

Even Candlestick patterns help to determine moves that the stock is likely to make in the sessions ahead. Some of the popular and widely used Candlestick patterns include Bearish Engulfing pattern, Bearish Harami, Bearish Harami Cross and Bearish Dark Cloud Cover. A gap-down close indicates selling pressure, which if not filled soon, can take the stock down further and dent the overall sentiment.

Trendline also plays a crucial role. A break in the trendline on strong volumes breaks the positive sentiment. A trend line is a bounding line for the price movement of a security, which is formed when a diagonal line can be drawn between a minimum of three or more price pivot points. Though a line can be drawn between any two points as well, it does not qualify as a trend line until tested. Hence the need for the third point.

Trend lines are commonly used to decide entry and exit timing when trading stocks. Traders who are play the market from a short-term horizon tend to use charts based on interval periods such as 1 minute (i.e. the price of the security is plotted on the chart every 1 minute). On the other hand, with traders with a long-term view use price charts based on hourly, daily, weekly and monthly interval periods.

The Moving Averages also help in determining the medium-term outlook for the stocks, while a Crossover decides the trend that can significantly influence the direction. Gaps are areas on a technical chart where the price of a stock (or another financial instrument) moves sharply up or down, with little or no trading in between. As a result, the asset's chart shows a gap in the normal price pattern.

Here are some BSE 500 stocks that showed a 'gap-down' pattern close in the last 15 sessions

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