Classic Techniques  |  SEP 1997

Identifying Significant Chart Formations by Daniel L. Chesler

Before computers became commonplace, technical traders spent most of their time studying their charts, looking for consolidation and reversal patterns. Today, many traders have moved away from using classic chart patterns to methods based on quantifiable indicators. Here, the two disciplines are combined, using chart analysis and basic indicators to identify trading opportunities. Despite the growth in mechanical systems trading over the past decade, classical chart pattern analysis continues to enjoy a wide following. For example, Robert Edwards and John Magee’s Technical Analysis of Stock Trends, considered to be the bible of classical charting, remains one of the all-time best-sellers in the field of technical analysis. Last year’s Dow Jones Telerate seminar in New Orleans featured no less than six speakers on the topic of classical chart patterns, including two institutional traders who run proprietary currency trading desks. And in 1995, the New York Reserve Bank undertook an investigation of the predictive powers of the venerable head-and-shoulders chart pattern. Their research found that the head-and-shoulders pattern yielded significant ex-cess profits in select currency markets. Among their explanations for this phenomenon was that a sufficient number of traders who recognize the pattern invariably trade it, thus driving prices in the expected direction. And finally, over the past several years there has been a swell of interest and investigation into Wyckoff charting principles, as has been seen in STOCKS & COMMODITIES and various publications. Clearly, charting, the blue-collar approach to technical analysis, is alive and well.

by Daniel L. Chesler, CTA, CMT