In this section, the technical analysis methods have been cate-gorized not only be the underlying techniques used but also by the type of output that each category generates. We will begin this summary with pattern recognition, probably the most popular and easiest to use technique within the technical analysis family. This method involves scanning a raw open-high-low-close (OHLC) chart (such as a vertical bar chart or a candlestick chart) from left to right searching for identifiable price formations.
Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to predict market direction or to generate buy and sell signals. Many technical stud¬ies share one common important tool: a price-time chart that emphasizes selected characteristics in the price motion of the underlying security. One great advantage of technical analysis is its “visualness.”
IDENTIFYING PRICE FORMATIONS
Proper identification of an ongoing trend can be a tremendous asset to a trader. However, the trader also must learn to recognize recurring chart patterns that disrupt the continuity of trend lines. Broadly speaking, these chart patterns can be categorized as reversal patterns and continuation patterns.
REVERSAL PATTERNS
Reversal patterns are important because they inform the trader that a market entry point is unfolding or that it may be time to liq¬uidate an open position. Figures 3-1 through 3-4 display the most common reversal patterns.
CONTINUATION PATTERNS
A continuation pattern implies that while a visible trend was in progress, it was interrupted temporarily and then continued in the
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