Classic chart strategies
The playbook of chart traders: trends, pullbacks, breakouts, ranges and reversals.
Riding a trend
Trend following: only look at stocks whose averages are stacked upward, and prefer buying on calm dips rather than after big jumps. The tool's default strategy is exactly this.
Pullback (they call it 'shrink-volume pullback'): in an uptrend, wait for a quiet dip back to the 5- or 10-day average on low volume, on the idea that the trend is resting, not ending.
Golden cross: a short average crossing above a longer one, ideally with rising volume, is read as a trend starting.
Breakouts and ranges
Breakout: a price closes above a level it kept failing to pass (say, its 20-day high) on at least twice normal volume. The idea: buyers finally won. Many breakouts fail and fall back, called a false breakout.
Range (box) trading: when a stock bounces between a floor and a ceiling for weeks, some traders buy near the floor and sell near the ceiling, until the range breaks.
Reversals, patterns and sentiment
Bottom reversal: after a long fall (15%+), a day with 3× normal volume and a close above the open is read as sellers running out. It's riskier: falling prices often keep falling.
Candlestick patterns: named shapes in daily price bars, like one strong up day, three small down days and another strong up day.
Sentiment cycle: crowds swing from fear to greed. Very low trading activity can mark gloom near a bottom; frantic activity can mark euphoria near a top. Easy to see afterwards, hard in real time.
Popular theories with little evidence
The tool also ships Elliott wave theory (markets move in five waves up and three down) and Chan theory, a Chinese system of price structures. Both are popular, but they're flexible enough to explain almost anything afterwards, and there's no solid evidence they predict prices.
A stock tops out at $50 three times in two months. One day it closes at $51.20 on 2.5× normal volume: a textbook breakout.
Two days later a weak earnings guide sends it back to $47. The chart signal was 'right' by its rules, and the trade still lost: news the chart couldn't see won.
Key terms
- Trend following
- Buying what's been going up and selling what's been going down.
- Pullback
- A temporary dip within an ongoing trend.
- Breakout / false breakout
- A move through a key level; a false one quickly reverses.
- Range trading
- Buying near a recurring floor and selling near a recurring ceiling.
Chart strategies are stories about crowd behaviour. They're useful for understanding how traders think, but none works reliably.