OPENING POSITION
April 2002
Is chart reading a science or an art? Like so many things, it depends on how you look at it. One of the most frustrating and time-consuming aspects of technical analysis is learning to identify chart patterns (which is why it's such a popular subject with STOCKS & COMMODITIES readers). And there are quite a few patterns to choose from: diamonds, double tops/bottoms, head and shoulders, ascending/descending/symmetrical triangles, flags, pennants, wedges - the list goes on. These are just a handful of the chart patterns you can expect to find repeatedly - though not with any regularity, making identification all the more challenging. I remember the feeling of accomplishment when I spotted my first triangle, an ascending one. But that feeling of accomplishment quickly disappeared when prices did not move in the direction I expected.
As I continued my quest to identify chart patterns, I came to the realization that pattern identification is not merely based on the theories described in the vast amounts of technical analysis literature; it's based on practice. When you look at a chart and try to identify patterns that have already formed, there is a heavier emphasis on the scientific aspect. But when it comes to a pattern that is in the process of forming, it's a different story. Suppose, for example, you see what you perceive as a left shoulder and a head appear. You conclude that it's the beginning of a head and shoulder formation. Next, you see what you think is the right shoulder starting to form, leading you to assume the pattern has formed a top and started its descent.
But suddenly, for no apparent reason, the price turns and starts drifting up. It's not a head and shoulders formation after all. Back to square one!
It is at times like these that the artistic aspects of chart reading come into play. And some who have mastered that art can rely confidently and solely on chart patterns to make successful trades. One such master is technician Terry Bedford of Bedford & Associates, who is our STOCKS & COMMODITIES interview subject this month. A true chartist, he looks for the one or two chart patterns he likes best and bases his short-term trades on them alone, without the aid of fundamentals.
One of the more common patterns used by traders is the breakout. Unfortunately, it's easy to forget that once a breakout is complete, other patterns follow. Our lead article this month, "Post-Breakout Patterns" by David Penn, will, we hope, prevent you from deleting that chart off your screen once you complete your trade - a trade you placed after applying the scientific aspect of chart reading - and, instead, will help you use your chart-identification artistry to take advantage of patterns that typically follow the breakout.
Jayanthi Gopalakrishnan,
Editor
Originally published in the April 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.
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