Handbook of Finance: Investment Management and Financial Management

Chapter 35. Volatility and Structure: Building Blocks of Classical Chart Pattern Analysis

DANIEL L. CHESLER, CMT, CTA

President, Chesler Analytics

Abstract: Technical analysis, also known as "charting," attempts to gain insight into future price movements from the analysis of a given asset's price time series as well as other transaction-related data sets. It is perhaps the oldest form of financial analysis in the world, and traces its roots back to at least the seventeenth century. Despite arguments against technical analysis, notably the efficient market hypothesis, which asserts that market prices already reflect all known information, technical analysis remains part of the decision-making process for a majority of sophisticated traders and investors. Traditional technical chart patterns, also known as "classical" patterns, may be decomposed into their constituent parts, yielding a more formalized model for pattern analysis. The model relies less upon the subjective interpretations of the analyst, and aids in identifying when the distribution of an asset's prices changes are about to deviate sharply from their recent norms.

Keywords: technical analysis, chart patterns, volume, volatility, time series analysis, price momentum, point-and-figure, Robert D. Edwards, John Magee, Charles Henry Dow, serial correlation, quantitative finance, price trends, trend following

Interpretation of classical chart patterns is one of the oldest and most foundational of all techniques comprising the ...