Confirmation on a Chart: Meaning and How It Works

What Is Confirmation on a Chart?

Confirmation on a chart describes a chart pattern that shows a sustainable stock trading opportunity, which by virtue of its persistence is confirmed (given credibility). This typically requires a minimum of three days that consist of several data points before confirming a new trend or pattern formation is underway.

How Confirmation on a Chart Works

Confirmation on a chart is one of many indicators followed by technical analysts. Technical investors are mainly interested in chart trends and less concerned with stock fundamentals, such as company sales and cash flow. Technical analysts use confirmation on a chart as supporting evidence when making their buy and sell recommendations. Traders will oftentimes chart several indicators simultaneously to provide as much data as possible when considering whether to buy or sell a stock. It is common practice for technical traders to look for confirmation on a chart from three charts to support their conviction.

Technical investing through the use of charts is all about understanding and detecting patterns. Once you can visualize and name a pattern, it becomes possible to look back over many years to determine how effective that particular pattern has been in determining quantifiable trends. Often, what appears to be a chart pattern is actually just more sideways movement within an ongoing trading zone, meaning no particular direction has been realized. Confirmation on a chart occurs when the predicted movement actually plays out. The lexicon of chart pattern names is extensive, with a variety of entertaining names ranging from abandoned baby to dark cloud. Each of these patterns has a distinguishing shape.

Confirming Candlesticks with Four Points of Data

Candlestick patterns typically use four data points to define their shapes. These are specifically the stock or asset's opening price, the daily high, the daily low, and the closing price. Taken together, these four pieces of information describe a particular price action pattern for a given day. In practice, candlesticks can be combined over a series of days to make trading decisions.

An example of a candlestick is called the hammer, the shape made when the stock price opens down significantly but then rallies to a new high. The opposite also applies as seen with the hanging man pattern.

Candlestick patterns are watched closely by technical traders hoping to see results replicate over time. The doji is the pattern formed when a stock opens and closes at nearly the same price. The doji figure looks like a candlestick cross, or inverted cross, and indicates that indecision may be the major force underlying a stock’s lack of sustainable movement.

Confirmation on a Chart as One Tool in the Toolbox

Technical trading works well when times are fairly stable. But prudent investors know to keep their eye on the larger winds that can cause seismic shifts in an economy, which have nothing to do with a particular stock’s value or  chart movements. An analogy is that of a bricklayer who positions his bricks along a new wall without realizing the cathedral under construction stands on a shifting foundation. In this analogy, the cathedral is the total of all economic forces at work during a particular time period and the wall is a single component. Seasoned investors know to pay close attention to the larger forces that can reshape an economy as they use their many short-term charting tools.