Profiting with Chart Patterns book

Confirming Entries

& Managing Exits
Chart patterns are 
the 
most powerful technique for finding great trades and managing 
the trades once they are entered. Chart patterns truly indicate the psychology of the 
market. They are very important for any trader to know and understand in order to 
manage risk in the market. The name of the game in trading is getting risk as low as 
possible.
This chapter explains what chart patterns are and how they are useful. You will also 
learn about the psychology of patterns and the goals of chart pattern analysis.
What is a Pattern?
The interesting thing about chart patterns is that they really have two different 
definitions that are commingled and dependent on each other. The first is that patterns 
indicate
the psychology of the market. When you see a pattern in the chart, it will tell 
you whether the market is getting bullish or bearish based on the shape of the pattern. 
The more interesting thing about patterns is that they also 
determine
the behavior of 
the market. When certain patterns form, the market can see them very readily in the 
chart. Even though people do not think in these terms, they definitely can see that 
support is being violated or resistance is being tested. When traders see this happen, 
they will jump in and either buy or sell because of the existence of the pattern. 
Patterns work together and the reason they work is because investors, traders, and 
fund managers react the same emotional way to them.

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Chapter 1 Confirming Entries & Managing Exits
Profiting with Chart Patterns
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nirvanasystems.com
Psychology of Support Bounces
This example shows the psychology of patterns with a support level. In this chart of 
Delta Air Lines, you can see that we had a support level at $40 in June, August, and 
February that was hit four times. Each time the support level was hit, price bounced 
off of it fairly readily. This tells the market that there is a solid value at $40 for Delta 
Air Lines. Whenever the market jumped in to buy the stock, driving it back up, the 
stock fell to $40.
Figure 1-1.
Support Level Example for DELTA AIR LINES
After the fourth bounce in February, we came up and crossed the $47 level early in 
February. We had multiple chart points throughout the last year where $47 was not 
crossed. Then, it was solidly crossed in early February. The market just saw price 
bounce off $40 and then break through the $47 resistance level with strong buying 
pressure. That told the market that this stock was going higher. The subsequent move 
took it all the way to $$49 a share, a 22% increase in a very short period of time.

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Chapter 1 Confirming Entries & Managing Exits
©
 Nirvana Systems Inc.
1-3
Profiting with Chart Patterns
This example illustrates how powerful chart psychology is. These kinds of patterns 
happen all of the time in the market as we will see in further examples.