Opening Position
September 2006
The names are colorful and memorable: Bullish engulfing, triangles, flags, pennants, three-bar reversals, double bottoms, double tops, cup-and-handle...these are just a handful of words that cross your mind when you hear the term chart patterns. One aspect of technical analysis I find fascinating is how to identify chart patterns as they are unfolding and, based on the pattern, attempt to determine how far prices will move and in which direction. Often, I come across patterns that I think are forming, but the price behavior would end up going in a direction they weren't supposed to. To keep my sanity, I blame the market, but it's enough to bring me back to the chart pattern drawing board. Unfortunately--or fortunately--patterns are not objective. Given that you can't quantify their behavior, it makes them more difficult to apply.
One individual who has been able to identify chart patterns successfully is chart pattern expert and STOCKS & COMMODITIES Contributing Writer Thomas Bulkowski, the Technical Analysis of STOCKS & COMMODITIES interview of the month. By speaking with him, we were fortunate enough to gain a better understanding of chart patterns. His extensive knowledge has given him the ability to understand which patterns can be applied with some amount of confidence and which ones can't. You'll also gain some understanding about how he trades. In fact, he gives us a peek at one of his entries in his trading book. The interview starts on page 46.
Trading chart patterns doesn't necessarily mean identifying the usual triangles, or flags and pennants. There is another side to the equation, and Raghee Horner discusses it in her article "Trading The Forex Wave," which starts on page 19. Here, you'll learn to look at a broader picture of the markets by understanding the building blocks of patterns. This technique has helped Horner herself avoid whipsaws, a common problem among pattern traders, especially in markets that are trading sideways. While I'm on the subject of sideways trading markets, I should mention that we have included an article on the adaptive price zone indicator by Lee Leibfarth (starting on page 28). This is an indicator that can help you identify reversal points and time your trades well. Given the way the markets have been acting since mid-May, with political tensions in the Middle East and Federal Reserve chair Ben Bernanke's comments about the US economy, isn't that something we desperately need right now?
Jayanthi Gopalakrishnan,
Editor
Originally published in the September 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2006, Technical Analysis, Inc.
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