CHART CHAT
Pattern Recognition
In this edition of Chart Chat, we will discuss Technical Analysis (TA). As covered in Chapter 2 of our publication When to Buy and When to Sell; Combining Easy Indicators, Charts, and Financial Astrology (now available on Amazon), TA is a very popular mechanism used by investors and traders alike. As also discussed, we believe that human emotion and overall market sentiment controls the markets, especially on a short-term basis.
Whether you have learned TA through online education, trading courses, physical schooling, or are still a novice, it is important to know the underlying reasons that it is used throughout the investing community. There are countless numbers of stock chart “patterns” in this new age of increased day-trading, and social media. Some have been used consistently through time, while others are being developed every day, with advanced algorithms and calculations. Though we explain in our publication that most chart patterns are “lagging indicators,” as the informational data points are all in the past (even if only a few seconds), traders use probabilities and statistics of known repeating patterns to trade the future.
Pattern recognition, which improves with experience, is the main skill used by TA (day and swing) traders. It is also used in pre-programmed machine trading systems (and bots), by professionals who integrate these calculations into their auto-trading platforms, making it difficult for the retail trader to keep pace with the price action. The most important factor to remember regarding pattern recognition is that everyone is taught the same strategies, no matter the source of education, on how to react to the pattern.
This “recognition” then creates a wave of buying or selling, based on the anticipation of the continuing pattern, or reversal. There are other components that are used in combination with the chart pattern (as there should be), like volume, price strength, cycles, and economic data, as well as others. However, as we continuously repeat, it the response and reaction (emotion) that drives the market action at any given time, especially short-term.
In Chapter 2 of our publication, we detail some of the most common technical chart patterns, including the Head & Shoulders, Double and Triple Tops, Bull & Bear Flags, Consolidation, Topping and Bottoming Tails, and more. We also provide basic education regarding Moving Averages, and Support & Resistance, which are major foundations of TA. Additionally, we discuss how to identify confirmation and divergent signals to further your understanding of this approach to investing/trading. There is a multitude of sources to learn the most basic, to the highly advanced, technical analysis formations, but as always, we try to keep it simple and non-time consuming.
In future editions of Chart Chat, we will continue to provide various technical pattern education, analysis, and potential price movement set-ups.
Astrologically speaking, planet positioning and transits through the zodiac houses and signs has many similarities to technical analysis. The theme of cycles, repeating patterns, and historical data can be viewed the same way, as the probabilities can be calculated for previous percentages of success. The difference is the use of an Ephemeris (see Chapter 4 of our publication for details), which allows for future positions to be known, unlike the next line, bar, or candle on a technical chart. Although no source will be 100% accurate, this extra layer can be useful. For those interested, please refer to Trader Transits and U.S. Stock Market blogs, updated regularly on this site.
