When you see a price pattern starting to form, you know that the stock your are watching is starting to slow down, or consolidate, and that you need to slow down, take a step back and evaluate what is happening on your chart. What you don't now is whether the stock is going to breakout and continue moving in the same direction after it slows down or if the stock is going to turn around and change directions.

Price patterns are a typically under-utilized yet extremely valuable tool in your stock-trading arsenal. It may take a little while to get comfortable with dealing with the subtle nuances and occasional ambiguity that are a part of price patterns, but once you do, you will almost be able to see into the future.

Price patterns are visual representations of market psychology. They tell you when traders in the market are excited and moving, when they need to take a moment and catch their breath and regroup and when they are ready to get moving again.

[To learn more about price patterns, check out these articles and videos on Continuation Patterns (to learn about Pennants, Flags, Wedges and so on) and Reversal Patterns (to learn about Double Tops, Triple Bottoms, Head-and-Shoulders and so on).]

All price patterns are made of the following four pieces:

- Old trend: the trend that the stock is in as it starts to form the price pattern

- Consolidation zone: a constrained area defined by set support and resistance levels

- Breakout point: the point at which the stock breaks out of the consolidation zone

- New trend: the trend that the stock enters as it comes out of the consolidation zone

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To learn more, click here to watch the video on Price Patterns.