A Complete Guide to the Futures Market, 2nd Edition

CHAPTER 10

Is Chart Analysis Still Valid?

I always laugh at people who say, “I’ve never met a rich technician.” I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician.

—Marty Schwartz

Most traders who have never used chart analysis (and even some who have) are quite skeptical about this approach. Some of the commonly raised objections include: “How can such a simple analytical approach work?” “Since key chart points are hardly a secret, won’t large professional traders sometimes push the market enough to trigger chart stops artificially?” “Even if chart analysis worked before it was detailed in scores of websites, books, and magazines, isn’t the method too well publicized to still be effective?”

Although the points raised by these questions are basically valid, a number of factors explain why chart analysis remains an effective trading approach:

1. Trading success does not depend on being right more than half the time—or, for that matter, even half the time—as long as losses are rigidly controlled and profitable trades are permitted to run their course. For example, consider a trader who in March 1991 assumed that September 1992 eurodollars had entered another trading range (see Figure 10.1) and decided to trade in the direction of any subsequent closing breakout. Figure 10.2 shows the initial trade signals and liquidation points that would have been realized as a result of this strategy. The implicit assumption ...