Chart Patterns

As we are about to delve into flag patterns and flag trading I thought it would be useful to go back to basics and dig up the consensus opinion of what a chart pattern is. The following definition of chart patterns comes from Wikipedia.

A chart pattern is a pattern that is formed within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period of time. Chart patterns are used as either reversal or continuation signals.

Some people claim that by recognizing chart patterns they are able to predict future stock prices and profit by this prediction; other people respond by quoting "past performance is no guarantee of future results" and argue that chart patterns are merely illusions created by people's subconscious. Certain theories of economics hold that if there were a way to predict future stock prices and profit by it then when enough people used these techniques they would become ineffective and cease to be profitable. On the other hand, if you can predict what other people will predict the market to do then that would be valuable information.

As you can see there are some very differing views. It seems to me that many trading methods are successful, especially for those who focus on a particular method and manage to establish the exact environment in which a particular price movement takes place. After all, it is only like driving or playing chess. When certain situations develop there is a recognised strategy for both taking advantage of it or avoiding the risks arising. It is the ability to fine tune your understanding of the environment that makes the difference between success and failure.