The authors thank many readers for helpful comments: Mike Dempster, Valérie Gastaldy, Ramo Gençay, Mark Hoeman, Richard Levich, Ike Mathur, participants at a Kepos Capital Management seminar and an anonymous referee. Brett Fawley provided excellent research assistance. The authors are responsible for errors. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
1Lo and Hasanhodzic (2010) survey the long history of technical analysis; they present evidence that ancient peoples tracked asset prices and might have engaged in technical analysis. Nison (1991) notes that Munehisa Homma reportedly made a fortune in eighteenth-century Japan using “candlestick” patterns to predict rice market prices. Schwager (1993, 1995) and Covel (2005) discuss how technical analysis is an important tool for many of today's most successful traders.
2Murphy (1986) and Pring (1991) provide a much more comprehensive treatment of technical analysis and these principles. Rosenberg and Shatz (1995) advocate the use of technical analysis with more economic explanation.
3A resistance (support) level is a set of local maxima (minima) for an asset price. These levels can be static or a function of time. George Davis of RBC Capital Markets identified this triple top example in Figure 12.1 (Clements, 2010).
4We define the channel rule following Taylor (1994). Sullivan et al. (1999) ...