Lately I have been thinking more and more about charts and chart patterns of how they are seen / intrepid today versus 30 - 40 years ago. Today, with all the instant information available to anyone about every aspect of the markets, along with every person and their grandmother being able to read and understand chart patterns.... do they really have the same meaning as they once did decades ago?? So often in so many sites i been in and so many traders i have seen experience failed set-ups after set-ups.... yet every one still considers charts legitimate. How many times have you not been in a trading room or on a service, where you see a set-up fail more often than not... and everyone still buying into the myth that somehow we should be looking for "a b c ... x y z set up? How many times in your own trading did a perfect set-up not follow through.... making you get out at your stop loss limit? My point is..... if a set-up or pattern only works 50% of the time or less..... then is it really a set-up?? I know I know.... have a stop loss in place.... and as long and the loss is smaller then the gain when it does work... then you should make money.... providing your sharpe ratio and batting average are set up correct.... But ... its still a coin flip whether or not a set-up will work is it not? ... same as random.... Only problem is.... the more i think about it the more i see a change in the markets. I'm beginnig to think that these set-ups and patterns can and will be used against you on any given trading day. Its not an advantage at all. To me it seems discipline is now much more critical to a trader than chart knowledge.... which is still why newbies get wiped out. Pull up a chart... ask 10 different pros to interpret it.... the answer will be all across the board.... but regardless of the outcome... all ten pros can control their money management with superior discipline.... giving them a heads up the rest of the dumb money. Today i think more and more pro money is looking at charts and patterns and trying to see how they can use it against the rest of the crowd. .... just like they do with economic reports.... earnings... and news releases. Look at some of the high multiple stocks out there with strong charts.... what happens when the earnings come out and the numbers only meet or hardly exceed the whisper.... KA-PLUNK!! Chart patterns are going the way of the dinosaur i think.
I dont think the patterns will go away. Yes everyone knows them but only a very few will make any money with them. How can flags and double tops and bottoms go away? They map human nature and human nature is probably the one thing that will never change.
= more pro use charts. = in general charts are not affective tool in making money. the only logical conclusion is more pro are using chart and one when you turn pro, start using charts.
If you think human nature (as bearbelly mentioned) is different now, then charts are useless. However I will point out that your analogy regarding high multiple instruments is incorrect. Inappropriate pricing has been around as long as fear and greed. Tulips, broadcasting, and the internet on a mass mania basis, with more to come. Not to mention all the past, present and future individual company micro scenarios. Remember KMRT was pink, trading at .07. Or was that Braniff near $200. And regarding "everyone" being able to read charts... I've got 2 neighbors... one owns MU. Uses his quarterly brokerage statements to get pricing. The other, invests for income only. Neither have ever seen a chart let alone how to read one.
I posted this before and didn't get a single reply on it. STOCK CHART PATTERN FAILURE RATE ref: Enclopedia of Chart Patterns by T. N. Bulkowski PATTERN FAILURE RATE % DOUBLE TOPS 65 DOUBLE BOTTOMS 64 HEAD AND SHOULDERS BOTTOMS 5 HEAD AND SHOULDERS TOPS 7 RECTANGLE BOTTOMS 0 RECTANGLE TOPS 2 TRIPLE BOTTOMS 4 TRIPLE TOPS 15
Chart patterns are more than just a map of where the price has been. They are actually imprints formed by human behavior in the market and once understood and recognized can be used to the trader's advantage. It's not as if someone is out there saying "this year we will form a head and shoulders pattern on the chart". It just happens from a series of greed and fear. It's like the chicken or the egg theory. These patterns are as old as the market, I say just go with it.
Perhaps because of the continuing problem of defining the pattern, much less defining "failure". For example, if the "double top" fails, then how is it a double top? LC
To further convolute the situation does it have to hit the exact tick side by side to be a double bottom or top or any other pattern for that much? I don't believe so. Markets are imperfect. Some people enter at market and some on limit orders causing sips of a tick or two very common.
Like snowflakes every chart is different. Flags seem like a no brainer but try to trade them and you quickly learn that every flag is different. Then you start to look around for those market signs that confirm or deny a pattern and you take another step forward.