Intraday trading is a process that uses charts and patterns to decide whether to invest in a stock. The analysis of various charts is known as technical analysis. This form of trading entails the purchase and sale of stocks, ETFs, derivatives, foreign currencies, and other securities all within the same trading day.
Since transactions are both initiated and concluded on the same trading day, there is no opportunity to maintain positions overnight. These transactions take place during standard market hours and traders must close any open positions before the market closes each day.
If you acquire shares at around 11:00 a.m., you need to sell them by 3:30 p.m - which is the market's closing time. Day traders use daily price movements to earn profits and usually exit their trades after achieving small gains.
In this blog, let's understand some of the common chart-patterns used for Intraday trading:
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Intraday Chart Patterns
Stock market charts show the historical and current movements of share prices. Traders use this share price movement data to predict future price trends. Candlestick chart is the most common chart used for technical analysis.
Candlestick charts form multiple patterns that show recent price movements. These patterns exhibit a price behavior through which traders decide whether to buy or sell a share. A candlestick chart consolidates data within small time frames and shows them as single bars.
Here is a basic look of the candlestick chart:
The white candlestick is commonly seen as a green candlestick and the black candlestick is seen as the red candlestick.
Common Candlestick Patterns
Here is a list of some of the most common candlestick charts:
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Shooting Star Pattern:
This pattern shows a signal for bearish reversal. A shooting star has a small body with a long upper shadow. This formation shows that buyers pushed the price up, but sellers took control- driving the price back down. Traders interpret this as a sign to sell or prepare for a downward move when followed by a price decline.
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Doji Candlestick Pattern:
The Doji signifies market indecision and indicates a potential reversal. It has identical opening and closing prices, resulting in a small body with long upper and lower shadows. For intraday traders, the Doji Candlestick Pattern provides clues about the next market move, but interpreting its direction requires experience and confirmation from subsequent candles.
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Hammer Candlestick:
The hammer candlestick is a bullish reversal pattern that appears after a downtrend, suggesting a price rise. The hammer shows that sellers pushed the price down during the session, but buyers managed to bring it back up by the close. Traders look for the next candle to close above the hammer's low to confirm the reversal and enter a long position.
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Bullish/Bearish Engulfing Patterns:
A bullish engulfing pattern occurs when a small red (down) candle is followed by a larger green (up) candle that completely engulfs the previous one, suggesting a shift to upward momentum. A bearish engulfing pattern happens when a small green candle is engulfed by a larger red candle, indicating a potential move downward. Traders use engulfing patterns to identify entry and exit points for their trades.
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Flag Pattern:
The flag pattern appears as a sloping rectangle bounded by parallel support and resistance lines. This formation continues the existing trend until a breakout occurs. Traders watch for the price to break in the opposite direction of the current trend.
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Head and Shoulders:
The head and shoulders pattern predicts a reversal from bullish to bearish. It consists of three peaks: a higher middle peak (the head) flanked by two lower peaks (the shoulders) at the same support level. After forming, the pattern leads to a downward breakout, signaling a potential shift to a bearish trend.
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Double Top Pattern:
The double top pattern shows a bearish reversal chart. It is identified by two consecutive peaks at roughly the same price level, separated by a trough. This pattern indicates that the upward momentum is weakening, and a downward trend may follow as sellers gain control.
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Double Bottom Pattern:
The double bottom pattern is a bullish reversal pattern that appears after a downtrend. It features two consecutive lows at approximately the same price level, separated by a peak. This formation suggests that the selling pressure is diminishing and an upward trend may commence as buyers step in.
Conclusion
Intraday chart patterns are a main component of a day trader's toolkit. When used efficiently, these patterns help in making profits. Financial markets revisit historical behaviours and chart patterns to capture such data. The recurring trends and momentum allow traders to spot various opportunities and prepare for challenges. However, no single chart can promise profit hence backtesting strategies is essential.
All the chart patterns discussed above provide the necessary technical analysis for trading. By identifying breakouts and trend reversals in technical charts, you can enhance your trading acumen and make more informed decisions.
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