It's all about Patterns

Chart reading is very visual; it's all about the patterns.

In the beginning stages of a new directional trend, sometimes it's difficult to determine if it's a real trend, or just another fake-out. Or sometimes, we leave our computers for a while to take a break, and when we get back it looks like something has already started.

How do we know there's more to go in the trend? We look for divergence in the pattern.

For example, here's a move that already started. When I got back to my computer, how do I know that there is more to go?



There was no divergence yet between price and indicator. Price made a higher high, and the indicator also made a higher high.

Convergence.

The trend will continue.

And it did. Now, here's the same chart a few bars later:

Price made a higher high, but the indicator did not.


Divergence.

A sign that momentum has weakened, and the trend is probably near its end. Time to take off your positions.