"How can you be sure a new technical indicator has merit? In the case of a price pattern, you test the pattern over different time periods or sets of charts, making buys and sells at the points suggested by the technique. This simple research can easily answer the pertinent question: Would trading based on the price pattern make you money?"
"Let's look at an example of a more elaborate model of price behavior. Figure 1 begins a test of the oft-claimed relationship between stock trading volumes and price changes. The relationship is the magnitude of the price change relative to normalized volume. The full test is based on a random sample of data for 50 stocks during different periods. Figure 1 illustrates what I refer to as the classic 80/20 pattern: Most of the effects you care about, the 80%, are caused by or happen to a minority of the samples, the 20%. In this case, virtually all the largest price surges occur during a few days when the volume hits the highest category."
