That is a very clarifying point actually. The overly theoretical wave guys can be right until reality blindsides them. Price is nothing but a balance of supply and demand. Overselling will lower the price until buyers can't resist coming in, the price crossing a previous high will mean that there are very few sellers and if it gets the attention of traders there will be new buyers as well, etc, etc.
This is the way I look at it Chart patterns = price action=market participants feelings TA is the math of price action , which if used correctly can take some subjectivity out of the chart analysis.
Here is an example of a typical chart pattern everyone knows, the head-and-shoulders top. It has not exactly fully formed yet, but one can extrapolate the neckline since the right shoulder has already turned. The problem is, if one trades by the "rules" of the pattern, one would short the downward violation of the neckline, setting a stop at the high of the right shoulder. Yet because this pattern is so well known, you can almost be certain that there will be a wave of selling at the break of the neckline; so people begin to anticipate the pattern and start selling/shorting in anticipation it. This puts those traders who are still trading old patterns by the book at a big disadvantage -- those who are already short are using the neckline break as a "test" to see if there will be any buyers there. Because if one were bullish and wanted to buy this security/index, he or she would most likely wait until after the neckline break to buy into supply to capture the best price. The crux of the matter is: are the majority of future sellers of this security just selling based on pure technicals? If so, it would not be difficult to find the level where the most buy-stops would be located, in order to shake out/squeeze the "weak-hands" (technical buyers and sellers are by definition weak-hands, as they are price or pattern motivated and typically more bullish at higher prices and more bearish at lower prices). So if you are one of those people who would sell because of some known pattern, at least be aware that the position may be "crowded", and that others in that crowd may not have the same conviction that you may have. In many cases, that is the main reason why your stop would eventually get hit.
I am afraid we can still say TA works in general , as there could be some existing TA solutions already developed and designed particularly to resolve the issue. However, these solutions mostly are trade secrets that we don't even know their existence. Just a guess!
I've found that the less indicators you use, the better feel you have for the market. My system's profitability significantly improved once I began focusing on simple price, time, and volume analysis.
I also use very few indicators. When I enter a trade it is 50/50 decision for me. 50% of my trade entry decision comes from T/A with indicators and the other 50% comes from my feel for the current price action. I do not get all tied up in formalized systems or strategies for trade entry and exits. I keep things very simple, so I'm spending most of my time watching the action and trying to get a feel for the trade day. Yesterday I had 4 very good trades on the ES from open to 10:05 EST that I entered based on watching price action and T/S without using any specific strategy.
Where's the volume on your chart? "There are many traders who are familiar with its name (Head-and-Shoulder Top Formation), but not so many who really know it and can distinguish it from somewhat similar price developments which do not portend a real Reversal of Trend." --Edwards and Magee
You're right, the volume component of an h&s top is key in reading the pattern. The reason there is no volume is because the chart was of an index (BKX banking); substitute Citigroup (C) for a daily chart and you can see lower volume on the right shoulder peak vs the head.
Ah, I should have realized that. I notice so many people don't use volume in their charts and I jumped on yours. Sorry.