Saturday, December 28, 2013

How to Trade Breakouts for Bigger Gains and Less Risk

Stock charts are used by traders to forecast price action. These patterns are useful, but they are certainly not infallible. Rather than using them for market forecasts, I prefer to use patterns to develop complete trading strategies. Each pattern offers a forecast of the potential gain and a point where that forecast is proven wrong by the market action.

There are many investors who don't use chart patterns. In A Random Walk Down Wall Street, author Dr. Burton Malkiel showed that investors could not tell the difference between charts generated by actual market movements and a random number generator. Of course, Dr. Malkiel is correct that the patterns show up in random data. But that has nothing to do with whether or not the patterns are useful.  (more)

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