Sentiment Indicators - Renko, Price Break, Kagi, Point and Figure: What They Are and How to Use Them to Trade

Chapter 2. Price Break Charts: Key Concepts

The aim of Chapters 2-7 is to provide a basic understanding of price break charts, their construction, and their application in trading any market. The reader will learn strategies and tactics for trading with price break charting and analysis.

Pattern recognition is the science (and art) of inferring the nature of an object from the "pattern" of observations made on the object. Thus, given an observation, say a set of measurements from an object, one goal of pattern recognition is to categorize the object into one of several predefined categories. This basic idea is fundamental to much of science.1^[4]

One of the greater challenges in trading markets, even among more experienced traders, is determining when the pattern that the prices form provides a signal to enter a trade. This leads to a basic question: What is a price signal? Essentially, a price signal is a change in the price pattern that alerts to a buying or selling opportunity. A great deal of technical analysis literature focuses on describing what the ideal conditions would be for putting on the trade. A common phrase in trading, and a concomitant goal, is achieving a high-probable trade. An ongoing activity of the trader is becoming proficient at pattern recognition. The challenge is determining what kind of pattern is presenting itself to the trader. Is it stable? Are there underlying patterns that need to be detected?

For a trader to conclude that he has detected a high-probable ...