The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies

CHAPTER 3

On Trends

Don’t fight forces, use them.

—R. Buckminster Fuller

Market movements can create a bewildering number of patterns and variations of patterns. Simple structures take on different meanings depending on context, and patterns sometimes develop and resolve in unexpected ways. Add to this the complexities of the interactions of multiple time frames and related markets, and we end up with a seemingly infinite number of possibilities. The human mind needs some kind of structure to help process information, so various solutions have been proposed by different schools of technical analysis. The classic chart patterns (head and shoulders, double top, pennant, flag, wedge, etc.) are one attempt at providing structure. Other solutions have been proposed, ranging from in-depth quantitative analysis to the various schools of wave and cycle analysis; these, and many other approaches, work for some traders. All of these offer valuable perspectives, but let us turn our attention to a simple, robust framework that focuses on the fundamental price structures created by price trends.

THE FUNDAMENTAL PATTERN

What I am presenting here is not new; I owe a tremendous debt to the authors and traders who have come before me. No significant intellectual construct emerges ex nihilo—anything of value rests on a foundation built by someone else. In the case of trend structure, Tony Plummer (2010) has written about the basic trend pattern, which he calls the “price pulse,” with clarity and ...