When we are talking about option trading, we usually talks about short term trading. Short term trading means we will rely heavily on technical analysis. Technical is based on price history. Those history is reflected through charts. Technical analysis tells us when price will likely to move.
Chart pattern in technical analysis is used because we assume that trend tend to repeat itself. Chart pattern is a formation on stock chart which shows signs of future price movements. It shows the relation between price and time. There are many types of charts like line chart which only shows closing price, bar charts which shows high, low, opening, and closing price.
There are a lot of chart patterns that you can learn and there are so many of them. You might hear about these pattern: Hanging man, Shotting star, Inverted hammer, Bullish and Bearish Engulfing, Bearish and Bearish Harami, Pearsing Line, Dark cloud, Abondoned Baby, Three White Soldiers and Three Black Crows. If not don’t worry, I don’t know much about them too. I don’t use them. It’s like having lots of weapon, so much that we don’t know which to use. I really more on support and resistance line.
Support is a price level that the price of a stock will tend to stop going down and resistance is a price level that the price will tend to stop going up. When the price breaks the support line, it usually will go lower, and when price breaks the resistance line, it will usually go higher. Most of the breaks out are for real, but you should also watch out false break out.
In addition, you also needs to learn about chart indicators like Williams %R, MACD, the Relative Strength Index (RSI), Stochastics and Fibonacci Retracement Lines to help you in your trading decisions. These indicators will act as confirmation for your trading.