Trading Systems and Methods, + Website, 5th Edition

CHAPTER 4

Charting Systems and Techniques

The continued growth of computer applications has had a great impact on technical trading. The first techniques affected were moving averages and other mathematical trending methods, then easy-to-program indicators, followed by systematic optimization. More recently, econometric analysis, cycles, and pattern recognition have been the subject of new development. Many quote services that offer graphics can convert a bar chart to a point-and-figure or candlestick chart at the push of a button. Yet the techniques normally used in classic charting, such as trendlines, channels, and special patterns, are not easily automated because they often depend on the perception of the trader. However, a standard interpretation avoids errors and serves as a useful benchmark.

The systems and techniques included in this chapter are those that might be used by traditional chartists. Many of them are classic methods by famous analysts. They do not all require the use of a chart to be followed, but they are clearly interpretations of natural price patterns. The time that it takes for a price to move from one level to the next is not significant in many of these charting systems; it is only the level itself that is important. The common ground in this chapter is that the methods can be automated. At the end of the chapter is a summary of Bulkowski’s work, a study and ranking of most popular chart patterns.

This chapter begins with a review of a few of the earliest ...