Market Makers

A market maker is a broker or a dealer firm that agrees to hold a given number of shares in a particular stock thereby allowing for trading to occur. Market makers compete with each other for sales of a stock to the customer. They do this by quoting sell (ask) prices for a guarenteed number of shares. Upon receiving an order for a stock the market maker is able to fill the order almost immediately from their own inventory.

To the left you can see a screenshot of a Level II quote. On this screenshot you will see columns with the heading of MPID. These are the intials of the market makers, which are next to the number of shares in their inventory (given in 100's). This screenshot is of MSFT which trades on the NASDAQ where market makers play a large role.
Microsoft Corporation (NASDAQ (GS):MSFT)
What is the Ax

The "ax" is a market maker who currently has the greatest control over the stock's trading. They are who daytraders commonly look for on their Level II's. They are commonly seen supporting the bid and working to increase the bid. They could also be negatively controling the movement of the stock and selling heavily into the bid, driving the bid and price per share down. The ax may also be working to keep the price trading sideways or near the same price. Keeping the bid and ask very tight.

The ax does not exists at all times, but it is good to be aware of them when they do. They are often heavily controling the stock you are trading or looking to trade.

Commonly the ax can be found while the S-8 is in the process of completing. You should see an ax jump in and support the bid when the S-8 is close to completion. Then, of course with a strong S-8, this is accompanied with a S-8 Bounce, or strong rise in the price per share.

Finding the Ax
After you have been trading in a stock for a while, you will start to become quite familiar with its Level IIs. It is at that point that you should start to easily notice when that ax is in control and who they are. However, if you are new to a stock, there are a few tricks to finding them.

The Monthly Share Report for a stock will give you a lot of insight into finding the common ax on a stock. When viewing the share report, pay close attention to the top 5 spots (not counting the ECNs). ECNs should be ignored because they can be used by others to buy and sell shares and are usually retail and have little control over the stock.

It is important to note that ax is a slippery one. One MM could be an ax in the morning and another one in the afternoon. An ax can also use an ECN to hide most of their control over the trades.

Spotting the Ax Who is Selling
When the market is moving up nicely and a stock has a lot of new money coming into it, but it is hard even moving up. It seems to be meeting strong resistance at the same MM on the ask over and over. Then, when the stock turns negative, it quite easily falls. This is a strong sign that an ax is controling things from the ask side. This is very bearish for the stock.

Stock Trading : Table of Contents

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What is the Stock Market?

The short and sweet answer is, a way to own part of a company that you do not manage or even work for. Therefore gaining the ability to earn from a company's success.

Companies are either privately held or publicly held. When you hear of a company "going public" they are preparing to launch an IPO (Initial Public Offering). Simply put, the soon-to-be-public company is to allowing the general public to invest in their company and therefore own part of their company. So, when purchasing what is refered to as a "share" of a company you are doing just that, buying your share (a certain percentage) of a company.

What is a Stock?
A stock is your little piece of the larger company that you own and control. Granted, if you own stock in a company, you most likely own a small percentage of the company. As an owner of the company, though, you are entitled to your piece of "worth" that the company earns along with voting rights attached to the stock.

The physical representation of owning a stock is the stock certificate. The stock certificate is an official document (piece of paper) that is proof of your ownership. With the invention and popularity of online stock trading, you may never actually see a physical stock certificate. The brokerage in which you belong to keeps the records of your ownership electronically. This process of having electronic "holdings" makes the trading of stocks as easy as a mouse click. You used to have to actually sell and hand over the physical stock certificate to the brokerage or person you were selling it to.

Learning to Trade Online Tutorial
This tutorial aims to help guide you through the process of earning money off the stock market. From the basics of finding a brokerage, researching and finding a company to invest in and maintaining a healthy and profitable portifolio of stocks.

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Major US Stock Exchanges

Most of the stock securities are traded on what are called stock exchanges. Stock exchanges are where stock traders come together to decide on the price of a stock security. If you have ever watched the opening bell being rung at the NYSE you have witnessed the opening of the day's trading on an exchange and on a trading floor. This is an example of a exchange with a real location, with real stock traders yelling and screaming on the trading floor to make their trades. There are also other types of exchanges which are virtual and therefore lacking an actual trading floor. These virtual stock exchanges are made up of a network of computers where the stock trades are executed electronically.

You could look at the stock market as the Ebay of buying and selling company ownership. That is, instead of having to travel around store to store, garage sale to garage sale to find the best price to own something or to find a buyer for what you are trying to sell, you instead log into the stock market and you are all set. Buyers can find sellers, and sellers can find buyers and trade their shares back and forth.

The New York Stock Exchange

One of the most famous stock exchanges is the New York Stock Exchange or the NYSE. Also referred to as the "Big Board" the NYSE was first founded over two centuries ago, in 1792. The largest companies is america such as Coca-Cola, McDonalds and Wal-mart call the NYSE their home.

The NYSE is a listed exchange where a lot of trading is done face-to-face on the trading floor. The flow of an order starts first at the brokerage firm, then down to the broker on the floor (at their trading post). This person is also known as the specialist, and they match the buyers and sellers of a given stock. At the time of the actual sale the price is determined via auction where the current price is the greatest amount a buyer is willing to pay and the lowest price at which one is willing to sell.

The NASDAQ

The NASDAQ is a virtual stock exchange, refered to as an over-the-counter or OTC market. There is no physical location for the NASDAQ, nor are there floor brokers on the NASDAQ. All stock trades are done electronically through a network of dealers. While the NYSE used to be the only place to go if you where a big company, the tech boom of the 1990's changed that though. The NASDAQ is now the home of tech giants like Cisco, Dell, Intel, Microsoft and Oracle.

With the NASDAQ brokerages act as market makers for the stocks being traded. It is the task of the market maker to provide a streaming bid and ask price within a certain percentage spread for shares being traded on the NASDAQ. They have the option to match buyers and sellers directly. However, most often they will maintain an inventory of shares to sell to investors.

American Stock Exchange

The American Stock Exchange or the AMEX, is the third largest on the major US stock exchanges. When the AMEX was first created it acted as an alternative to the NYSE. However, now that is the role of the NASDAQ. The National Association of Securities Dealers or the NASD (the parent company of the NASDAQ) bought the AMEX in 1998. Mostly all remaining trading that occurs on the AMEX is with small-cap stocks and their derivatives.

Over The Counter Bulletin Board
This is the home to the renown penny stocks. Not really an exchange by itself, but really a sub-section of the other exchanges. For example, any small public company of the NASDAQ that do not meet listing requirements are consider OTC stocks or penny stocks. Due to the lack of regulation that exists in this market sector risk can be very high.



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Buying Stocks

You should now have the basic concept of the stock market, the exchanges that exists within it and just what it means to buy and sell a stock. Now you are probably wondering what it takes to get setup and get started buying and selling stocks yourself. Well, we're glad you asked!

Choosing a Stock Brokerage
Firstly, you will have to decide on a stock brokerage. There are quite a few online stock brokerages available. They range from the more pricey full-service brokerages with brokers who work with you to manage finances and investment to discount brokerages. Discount brokerages are much cheaper and allow you to do the research and management on your own.
A few brokerages to take a look at are:

OptionsHouse.com :: First 100 Stock Trades for FREE


E*Trade


TDAmeritrade


Your First Stock Purchase

While all of the brokerages have a somewhat unique way of letting you research stocks and enter orders to buy and sell a stock, they are all quite similar. Most brokerages will offer you rather in-depth tools to research and find your first investment.

Once you have located a worthy stock to purchase, you can lookup its quote. There are quite a few things that can appear on a full stock quote. However, the basics are: Sybmol, Last Price, Bid and Ask.
For example: MSFT (Microsoft Corp.), $26.56, Bid: $26.55, Ask: $26.56. We will explain about bid and ask more later. So, all you need to know to begin is for most companies that are traded by a lot of traders throughout the day (which are most of them) the bid and ask spread is very small. In our MSFT example it is 1 cent (26.55-26.56). When this is the case and you aren't buying 1 million dollars worth of the stock, you probably would never need to pay attention to the bid or the ask. Therefore, for the simplicity of first stock trade, let's look at only the Last Price (which is usually somewhere between the bid and ask).

At this point you would decide how much money you wish to invest. Let us say, you want to invest about $2700 in MSFT. At it's current market price you would be able to purchase about 100 shares. You would then enter a market order (there are other order types which we will cover later) for 100 shares of MSFT. Click "buy stock" and that should be it. Within seconds you should be the proud owner of 100 shares of MSFT.

To get a bit more in-depth will the methods of stock buying and selling, be sure the check out the next section, starting with: Stock Market Order Types.

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Stock Market Order Types

When trading stocks it is best to know all of the options you have with buying and selling them. While not all order types are supported by all brokerages across all exchanges, if you know them all, you will still be better off.

Market Order
This order type is used to execute a buy or a sell at whatever the current market price is. This is usually the fastest order type to execute. There is a risk however with this order type, because you are not control what price your order will be executed at. The risk is far less with a slow moving stock, but if a fast moving stock jumps 10% during your order's execution, that could cause some trouble for you.

Limit Order

With the limit order type, you set your price "limit". Therefore, giving you much more control over the execution price. A buy limit order would only execute at or below your limit price and a sell limit order would only execute at or above you limit price.

Stop or Stop Loss

This order type allows a trader the ability to add to their position if the market rises or to sell shares if the market declines. With buy orders the stop price is above the current market price. A sell stop order is placed below the current market price. Once the price of a stop order is hit the order (a buy or a sell) becomes a market order.

An example being if a stock has gain a lot in a few days and you do not want to sell, but you also do not want to loss out on all the profits. You might place a sell stop loss slightly under the current under the market price. Therefore if the stock continues to rise, you would not miss out and if the stock should fall, you would be able to take some profits.

Stop Limit

A stop limit order is basically the same as a stop loss. However, when it is activated instead of becoming a market order, it becomes a limit order.

Trailing Stop

The trailing stop is a fancy way to have a stop order. That is, instead of having a static stop price, a trailing stop has a dynamic price that adjusts to the current market price of the stock. As with the regular stop order a buy order is above the market price and a sell order is below the market price. A trailing stop to buy would decrease while the stock's price decreases and remains static as the stock price increases. A trailing stop to sell increases when the stock rises and remains static as the stock falls. When a trailing stop is triggered is become a market order.

Trailing Stop Limit

A trailing stop limit order acts the same normal trailing stop, but when it is triggered it become a limit order.

Sell Short
When you sell short you are betting the the stock with fall in price. What happens when you sell short is you are borrowing the stock at its current market price and immediately selling it. Also, you are agreeing to buy it back (Buy to Cover) at a later date hopefull at a cheaper price.

The SEC only allows for selling short to occur on an uptick or a zero-plus-tick. Therefore, you cannot sell short a stock that is in the process of plummeting.

Buy to Cover
After selling short, you must then agree to "buy to cover" your borrowed shares. Therefore, buy back the shares you borrowed and return them to the market.

Order Fill Amounts
All or None (AON) - If a trader was to specific an order as All or None, that would tell the brokerage to only fill their order if you can buy the full amount of shares desired. Therefore, if an buy limit order for 1000 shares of MSFT at 25 was entered and there were only 900 shares available before the price increased, the order would not be filled.

Order Durations
These are two of the most common order durations.

Day Order - An order that lasts until the market close
GTC Order (Good 'Til Cancelled) - An order that lasts until the trader cancels it.

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Reading Stock Quotes
If you are new to trading stocks then taking a look at a full stock quote can be a bit overwhelming. In this section, we aim to break down the major elements of the stock quote for your reading pleasure. Just below, you will see a screenshot of a Microsoft (MSFT) stock quote.



Last PriceThe last price is the price at which this stock was last traded. It may also be accompanied with last trade time, which tell you the time of day when the last trade occured.

Previous Close The previous close is what the last price of the stock was at the close of the previous market day.

Open Price
The open price is the price of the stock at the open of the market day.

Change / % Change The change tells you by how much a given stock's price has increased or decreased since the market open.

TickThe tick is usually shown as an up arrow, down arrow or hypen, representing the last trade on the stock was an increase in price from the previous trade, a decrease in price or no change in price respectively.

High/Low
There are a few variants you will come across for highs and lows on a stock quote. The most common being the 52 Week High and 52 Week Low, which show the highest and lowest price for a stock over the course of the past year. Some stock quotes also show this value over the course of the current market day (Day's High, Day's Low).

Bid/Ask
The Bid/Ask are where things get a bit interesting. The bid price is what someone who is looking to buy the stock is currently willing to pay. The ask price is what someone who currently owns the stock is willing to sell for.

A real world example being, you enter a mom and pop store and an item is priced for $5.00, you go the owner and say, I'll give you $4.50. The owner of the store is asking $5.00 to sell the item (his asking price), and you are bidding to purchase it at $4.50 (your bid price). If the owner lowers his asking price the sale will execute, or if the bidder raises his bidding price the sale will execute. Of course, the stock market is made up of many more than two people bidding and asking, but hopefully you get the picture.
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Level II Quotes
Okay, so what is level II you ask? Level II's provide the stock trader with a lot of very useful information about the stock's current trading. It shows at a glance all of the open orders for buys (the bid column on the left, in the level II screenshot below) and open order for sells (the ask column of the right, in the level II screen shot below).

Level II's are the order book of a stock on the NASDAQ stock exchange. When you place an order to buy or sell on the NASDAQ exchange, your order is routed through many different market makers, electronic communication networks (ECNs) or wholesalers. With Level II's you can see an ordered list of the best bids and asks from each. This gives you, the trader, a lot of detailed insight on price movement. For example a look at the asks in the right column would show you if the ask is "thin" meaning there are few market makers between the best ask and a large percentage jump up in price (thin ask example: 26.23, 26.25, 32.05, 42.05).

To look closer at the columns themselves, we have SHARES, MPID, BID/ASK.

SHARES: This represents the amount of shares ready to be bought (when in the BID column) or to be sold (when in the ASK column). The number is in hundreds so 100 is really 10,000.

MPID: These are the intials of the marketplace or market maker at the given bid or ask. For example: UBSS is UBS Securities, LLC.

BID/ASK: This is the price open for buying (bid) or selling (ask) a stock by the given MPID.

Three Main MPID TypesMarket Makers (MM) : These are firms who agree to provide liquidity the the given market. Penny Stocks liquidity are commonly controled heavily by some market makers. By making a market for you to trade stocks they are "market makers". They earn their money my profiting off the differences between the bid and ask prices of a stock. See the market makers for more information.

Electronic Communication Networks (ECN) : These are automated systems designed to match up buyers and sellers of a stock. Examples are: NITE, ISLD and ARCA.

Wholesalers (Order flow firms) : Some online brokerages have relationships with market makers or even a large group of market makers. If there is a need to handle a large amount of orders a brokerage may decide to use a wholesaler to execute the trades on their behalf.

We will take a much closer look at market makers in the next section.

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Introduction to Moving Averages
What is a moving average, you ask? Well, instead of looking at a jagged chart moving up and down you could choose to smooth out its price movements with a moving average. Therefore, a moving average is derived from the price of a stock over X number of market days.



Moving Average
Moving averages are technical indicators. Thus by definition of technical indicators, it is used to help evaluate the technical movements of a stock in order to predict future movements of the stock.

By averaging out, and therefore smoothing out the movement of a stock price a moving average gives a cleaner view of the overall movement of a stock. The more days used to average out and smooth out a stock chart, the slower that moving average is to react to a stock current price fluctuations.

The next two sections will highlight the two main types of moving averages. One being the simple moving average and the other being the exponential moving average.

Simple Moving Average
A simple moving average is formulated by adding up the last X number of market days’ closing prices and dividing that total by X.

For example, if you wanted to calculate a stock XYZ’s 3 day simple moving average. You would add up 3 day’s closing prices. Let’s say XYZ’s closed at, 10, 11 and 12 the last 3 days. These prices added together equals 33. We then take that number an divide it by the number of days used, which is 3. So, you would plot 33/3 (= 11) over 3 days on the chart to show the moving average.

($10+$11+$12) / 3 = $11 (3-Day Simple Average Price)

You might be saying, “Okay, great I know how to calculate a simple moving average now. So what, my charting tool already does that!” Well, this way you should hopefully have a better understanding of how the SMA works and therefore have a greater ability to use it to help with your technical analysis.

Simple Moving Average Example


The above chart shows 3 examples of simple moving averages. Obviously, the closer the time span gets to 0 days, the closer it represents the actual price chart, and the faster it responds to price trends. The opposite is also true, the greater the number of days used to calculate the SMA the less quickly it responds to the current price trend.

With looking at the simple moving average in the above chart, you will notice how it has the ability to quiet out some of the “market noise” and give you an easier way to predict future price movements.

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Exponential Moving Average
With simple averages the calculation is, well, simple. The simplicity of the calculation can sometimes cause a bit of a flaw to the SMA. The flaw is due to spikes in the price of a security.

For example, if you were to calculate the 4 day SMA of stock XYZ where its closing prices were, $2.90, $2.95, $3.00 and $2.95 the SMA would work just fine and smooth the price out to $2.95. Great, that sounds and looks about right.

In comes trouble, in our second example stock XYZ has a huge news event on day 2. Its closing prices over this 4 day span are $2.90, $4.95, $3.25, $3.15. See the large spike on day 2? That would cause the 4 day SMA to average the price out to $3.56, which is a bit high.



The exponential moving average to the rescue! With the EMA the calculation is a bit more complex in that it weighs the different closing prices within the moving average range. The EMA gives more weight to prices near the end of the range and less to those prices in the beginning of the range. This gives more influence to the current market activities of the stock. Which as you know, what is happening now in the market is what is most important to pay attention to.


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SMA vs EMA Moving Averages
Let us first summarize the exponential moving average. When choosing a moving average that can react quickly to price changes and trends, then the exponential moving average is the one to choose. Act fast in finding a trend and you act fast in making money.

A drawback to the EMA is it has a tendency to be a bit choppy compared to the SMA. Then, because of the choppy nature of the EMA, you may become faked out by false positives in the moving average. That is, the EMA could appear to be showing an upward trend beginning to form, when all that is really happened was a random spike in the stock’s price.

Your other option the simple moving average has the opposite problem. That is, the smoother SMA has a tendency to be a bit slower to respond to price movement and trends. While the SMA is slower to respond to the current market conditions of a stock, it guard you the trader from being faked out by a price spike. Then again, if you are too slow to respond to a trend, you may miss out on making money.

SMA Pros and Cons
Pros: Smoother moving average line, guard you from fake outs.
Cons: May not signal a trend as fast as the EMA, slower moving.


EMA Pros and Cons
Pros: Quick to react to price trends, reacts well to price jumps.
Cons: Greater susceptibility to fake outs, showing a trend when one does not really exists.

Which one should you choose? I would say both. Learn their unique strengths and plot charts with both an EMA and a SMA. One for a feel for what is happening right now with a stock’s trend (EMA) and one for a longer overall stock movement (SMA).

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Introduction to Technical Indicators

This chapter looks at what are called Technical Indicators. Technical Indicators are defined as, "tools that are implemented by a technical analyst to in order to determine the likelihood and direction of future price move trends."

Technical Indicators : Table of Contents
Introduction
Bollinger Bands
MACD
Stochastics
RSI
More Indicators...
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Bollinger Bands


Bollinger bands help you to evaluate a stock’s volatility over time. When plotting Bollinger bands on a chart will see one line above and one line below the price chart of the stock. When a stock is making major price movements or is very volatile its Bollinger bands will be farther away (expand) from the stock’s price chart. When a stock is moving steadily with minor price movements, the Bollinger bands will be closer to (contract upon) the stock’s price chart.

Bollinger Bounce
A common technical use of Bollinger bands is to predict when a stock’s price will “bounce” off the top or bottom Bollinger line and then return back towards the center of the Bollinger bands. Therefore, giving a bullish indicator to a stock whose price is close to or touching the bottom Bollinger band and a bearish indicator to a stock whose price is close to or touching the top Bollinger band.



Bollinger bands are intended to illustrate a stock’s current support and resistance levels. This means a low price the stock does well stays above (support) and a high price the stock has difficulty breaking past (resistance).

Bollinger Squeeze
Another common technique used to predict trends with Bollinger bands is called the Bollinger squeeze. When the bands contract so much that they begin to appear to “squeeze” the stock’s price chart, is when the Bollinger squeeze occurs. This is usually a a pending breakout which could be bullish or bearish. Should the stock’s price begin to break above the top Bollinger band it is a bullish sign that the stock with continue an upward trend. If the stock’s price breaks through the lower band, it is a bearish sign that the downward trend will most likely continue.



There are other techniques to determine trends with Bollinger bands. However, the Bollinger Bounce and the Bollinger Squeeze are the most commonly used, and now you know how to use them. Congrats!

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Moving Average Convergence Divergence (MACD)

The moving average convergence divergence indicator is commonly called the MACD. The MACD is designed to find up trends and down trends in a stock via its moving averages.

MACD


The MACD indicator is calculated using three attribute of the stock’s price movement. Those 3 attributes are usually shown as MACD (12, 26, 9).

The first number (commonly 12) represents the number of days used to calculate the faster moving average or EMA(12).
The second number (commonly 26) represents the number of days used to calculate the slower moving average or EMA(26).
The third number (commonly 9) represents the number of days used to calculate the “trigger line” using EMA(9).

Now, we will explain the actual visual aspects of the MACD. Refering to the image above you should see.

A blue line is calculated with the EMA using the first number of the MACD (commonly 12) minus the EMA using the second number (commonly 26). Therefore, EMA(12) - EMA(26).
The red line (the MACD Signal Line or Trigger Line) is calculated using the EMA using the third number (commonly 9). Therefore, the EMA(9).
The MACD Histogram is calculated (assuming MACD(12, 26, 9)) with the formula: ( EMA(12) – EMA(26) / EMA(9) ).
The Zero Line: The dark horizontal line, referred to as the “zero line” or “center line” is where the first two moving averages of the MACD equal zero. Therefore, using MACD (12, 26, 9) that would be when: EMA(12) - EMA(26) = 0. A cross above the zero line is considered a bullish signal and a cross below the zero line is considered a bearish signal.

To explain more about reading the histogram, the MACD histogram is the difference between the faster red 9-day EMA "trigger line" versus the slower blue line. When the distance between the red line and blue line increase, you will see the histogram bars getting bigger. This shows the divergence or the amount the faster and slower EMAs are diverging. When the distance decreases between the red line and blue line or converges you see convergence. Now where have I heard those two terms before? Oh yeah! The MACD is the Moving Average Convergence Divergence indicator; how about that?

MACD Moving Average Crossover
One of the signals most commonly used with the MACD indicator are the MA Crossovers. A Bullish MACD Moving Average Crossover occurs when the "slow line" of the MACD (shown above as the blue line) crosses above the “fast line” (shown above as the red line or 9-day EMA). A Bearish Moving Average Crossover occurs when the “slow line” of the MACD (shown above as the blue line) crosses below the "fast line" (shown above as the red line or 9-day EMA).

The image on the left shows you an example of a Bullish MACD Moving Average Crossover and a Bearish MACD Moving Average Crossover.

Its is very important to be careful with the MACD Moving Average Crossover, because while it is a popular one, it is also (on its own) a very unreliable one.




MACD Centerline Crossover
A MACD Centerline Crossover occurs when "slow line" (shown as the blue line above) of the MACD moves crossed the “center line” or “zero line”. If the cross over moves the "slow line" into positive territory (above the “zero line”) then this is a Bullish MACD Centerline Crossover. If the cross over moves the “slow line” into negative territory (below the “zero line”) then this is a Bearish MACD Centerline Crossover.

While the MACD can lag behind trends, being that the MACD is a moving average of moving averages, it is still one of the most popular indicators used by traders.

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Relative Strength Indicator (RSI)
The RSI or Relative Strength Index is a technical indicator used to find when a stock has been oversold or overbought. The RSI is usually plotted below the chart and its number always ranges from 0 to 100.



As you can see from the chart above the RSI is highlighted when it is above 80 and when it is below 20. The reason for this is that these are two important areas for the RSI. Any move below 20 on the RSI is a sign that the stock is oversold and may rebound soon. Any move above 80 is a sign that the stock is overbought and may fall in price soon.

RSI Overbought
When the RSI goes under 20 and then reverses and continues back up past to 40-50 range this is usually a strong sign that the stock is going to recover well from its recent oversold status and price drop. A move above 20 is sometimes known as a soft buy signal and a move back up over 50 is sometimes known as a strong or hard buy signal. However, if you wait for the 50, you could also be too late to ride the wave back up. Be sure to research well and time your trade better.

RSI Oversold
When the RSI goes above 80 and then reverses and continues to drop under 50, this is usually a strong sign that the stock is going to fall back down from its recent overbought status and price jump. A move back below 80 is sometimes known as a soft sell signal and if the fall continues down through 50 this is sometimes known as a strong or hard sell signal.

What are Chart Patterns?
In this chapter, we take a look at certain chart patterns to help you spot the next breakout possibility. All of the chart patterns we highlight are what you will most likely hear the most about in the stock forums you frequent. For example, "wow, nice head and shoulder forming here...this is breakout-bound!" - mrtraderz.


Symmetrical Triangle
The Symmetrical Triangle chart pattern is formed when a stock’s highs and lows converge together to form a triangle shape. Therefore, the stock is having less and less price fluctuation. This is a stand off with the buyers and sellers. The Symmetrical Triangle pattern is considered a consolidation pattern.



As shown in the chart image above, a Symmetrical Triangle Pattern has formed. You can see the increasing inability for neither the buyers nor the sellers to control the price. When viewed with a candlestick chart you will also notice the candlesticks becoming shorter and shorter.

What Does the Symmetrical Triangle Pattern Signal?
Commonly, the Symmetrical Triangle Pattern is a strong signal of a pending breakout, meaning that eventually either the buyers or the sellers will win the battle. When the battle is finally won by the buyer then a bullish run is likely and when won by the sellers, a bearish price drop is likely.

Applying the Symmetrical Triangle Pattern
When planning an entry into a stock with the Symmetrical Triangle Pattern, a trader would place an order inline with a buy triggered from a breakout through the top line of the triangle and a sell triggered from a breakout below the bottom line of the triangle.


Ascending Triangle
The Ascending Triangle Pattern is formed when a chart has higher and higher lows with a resistance level it cannot break through. This is commonly a battle being fought hard by the buyers of a stock. The stock’s intraday highs are not increasing, but its average intraday price is.



With the above chart you can see the bullish nature of the Ascending Triangle Pattern. The chart clearly shows how the buyers are pushing the lows of the stock up higher and higher. Should the pattern continue the buyers will eventually have a face-off with the sellers at the resistance price. Most often the buyers win this battle and push the stock through its resistance level usually causing a nice run.



The above image shows an example of an Ascending Triangle Pattern that resulted in the stock eventually breaking through resistance and having a nice bullish run.

Chart Patterns : Table of Contents

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Descending Triangle
Reverse all that we wrote about the Ascending Triangle Pattern and you have the Descending Triangle Pattern. This means, that the Descending Triangle Pattern is formed when the stock is showing strong support at a given low, but it is having lower and lower highs.



The struggle between sellers and buyers is being slowly won by the sellers in this case. So, while the stock is not reaching its lowest low quite yet. This is a bearish sign that it might do so very soon. We would be keeping a close eye on the support level line to be aware of if and when the stock’s share price breaks through support. At this point, it is very likely that the stock will have a heavy fall in share price. You can see an example of a bearish support break in the chart below.



Of course, the opposite could also occur if the stock shows signs of strength by bouncing off of its support line. This is a bullish sign of strong support and that buyers are fighting back. You can see an example of a bullish

Double Top Pattern
The Double Top Pattern is formed when a stock's price climbs to a resistance level once, bounces off and then climbs right back the same resistance level. Therefore, usually within a short time span, a stock hit two highs of nearly the same price. The Double Top Pattern is considered a reversal pattern.



The above chart shows an example of a Double Top Pattern. You can see the two "tops" formed after the share price had a recent climb. By the stock hitting these two "tops" or peaks, it is confirming a strong resistant. Therefore, it is likely that the stock will have great difficulty going any higher. The direction it will likely go is down.

Double Bottom Pattern
The Double Bottom Pattern is formed when a stock's price falls to a support level once, bounces off and then falls right back down to the same support level. Therefore, usually within a short time span, a stock hit two lows of nearly the same price. The Double Bottom Pattern is considered a reversal pattern.



The above chart shows an example of a Double Bottom Pattern. You can see the two "bottoms" formed after the share price had a recent climb. By the stock hitting these two "bottoms" or valleys, it is confirming a strong support level. Therefore, it is likely that the stock will have great difficulty going any lower. Chances are it will stay above support and soon begin to climb back up

Should the chart break through its "neck line" there is a good chance for a bullish run. See the chart below for an example of this price trend.

Penny Stocks, Stock Picks :: Penny Stock Finder
The Head and Shoulders pattern is classified as a reversal formation. The Head and Shoulder pattern can be seen in a chart when it has formed a peak (first shoulder), followed by a higher peak (the head) and a final lower peak (second shoulder). After identifying the head and shoulders, we can then draw what is referred to as the neckline. The neckline is a line that connects the beginning of the first shoulder and the end of the second shoulder. Any break below the neckline is a bearish signal and usually results in a continued fall in price.



Applying the Head and Shoulders Pattern
When planning a trade to take advantage of a neckline break, we use the existing Head and Shoulder pattern to estimate how far the stock price may fall. To do this estimation, first find the height of the “head” above the “neckline” and then using that height measurement, apply it from the neckline-break and measure down. The chart below shows an example of this.

Reverse Head and Shoulders Pattern
A mirrored version on the standard Head and Shoulders pattern, the Reverse Head and Shoulders pattern is formed with an initial valley (first shoulder), followed by a lower valley (the head) and finally a higher valley (second shoulder). The Reverse Head and Shoulders pattern occurs after a downward trend has occurred in the stock.



The above example shows an example of a Reverse Head and Shoulders pattern. When using this pattern to our investment planning, we would set a trigger price to enter at just above the neckline. The neckline is the line draw from the beginning of the first “shoulder” to the second “shoulder.” Any break above the neckline is a bullish sign of a possible price recovery.

Applying the Reverse Head and Shoulders Pattern
When planning a trade to take advantage of a neckline break, we use the existing Reverse Head and Shoulder pattern to estimate how far the stock price may climb. To do this estimation, first find the height of the “head” below the “neckline” and then using that height measurement, apply it from the neckline-break and measure up. The chart below shows an example of this.