Last week's Trader's Corner article delved into the first section of an inexpensive and seemingly simplistic little book on technical analysis: STIKKY STOCK CHARTS. In truth, the book offers the technical analysis tools the authors feel are most powerful.
The book requires readers to pause for a few days to absorb each section's material before moving to the next section, asking for a sort of honor code to be followed. I may actually be cheating to discuss the last two sections in this article, breaking the honor code, but that's what I'm going to do.
As I mentioned last week, don't be put off by that honor code, the asked-for promise that readers of the book will actually draw on the charts and not just eyeball them, or even the antiquated information that assumes you'll be calling your broker rather than punching in your own orders online. You won't encounter information on adaptive trading bots or entropic analysis of prices, but the information remains helpful for both new and experienced traders nonetheless. Newbies to technical analysis benefit from the quick introduction to trendlines and several tradable patterns while more experienced chartists are reminded of the benefits of keeping analysis simple.
Section 2 of the book identifies eight tradable patterns: rectangles, channels, double tops, head-and-shoulders tops, megaphones, ascending triangles, descending triangles and symmetrical triangles.
Some Formations from STIKKY CHARTS:
The publishers provide blank price charts with no trendlines drawn. They ask readers to identify patterns and predict the next price movement before turning the page, where they'll discover the authors' interpretations of the action. If you have young children and are reading to them, you'll recognize the technique employed to engage and teach readers, but try not to feel manipulated and indulged. It truly is a useful technique to take pen and pencil and actually draw some lines. In the intervening years since the book was published, some patterns have become recognizable to even the novice chartist, but the practice can prove humbling to even experienced chartists.
In those intervening years, some patterns have become more recognizable to even novice chartists. In some cases, that recognition sometimes seems to work against the reliability of some patterns, but pattern recognition remains an important tool for any trader gazing at a chart. While I might no longer count on a head-and-shoulders top to confirm or to meet any downside objectives if it does confirm, watching such patterns confirm or unravel proves equally useful. If traders see a bearish pattern fail to confirm or to fail to see follow through after confirmation, they've gained useful information about the strength of bullish intentions or upward momentum. Isn't that as helpful to know as a confirmation of a pattern?
Contrary to what some believe when they've been trading a number of years, hunting for and then drawing these patterns on charts does prove useful. Just as the trendline-drawing exercises in the first portion of the book reinforce important ideas about trading the trend, this section provides tactile reinforcement of ideas that mostly work, even if they don't always do so.
The second section and third sections also reinforce the need to set stops, with the pattern-recognition tools helping traders to determine the correct place for those stops. Failing to set stops results in temptation to stay in a trade going wrong, "which is exactly how investors the world over lose their money" (161) the book cautions, adding that it's also exactly how professional traders make their money from undisciplined traders. Learning where to set stops to minimize losses is "the most important concept" in the book, the authors claim (211).
These two sections also introduce the need to pay attention to volume patterns, too. Lately, Keene Little has been including charts in his Wednesday Wraps that show that while the NYSE was climbing through the last months, breadth measurements were dropping. STIKKY CHARTS' authors believe that to be a clear danger signal.
I would agree. I don't agree with all conclusions reached in the book, however. Those technicians pay attention to Fibonacci brackets are "cranks," the book concludes. However, so many traders watch prices in relationship to Fib brackets that they may be somewhat self-fulfilling: traders may automatically bail from a bullish scalp play when a possible bear flag has retraced 38.2-50.0 percent of the decline that immediately preceded it, for example, meaning that the Fib resistance "worked." Perhaps Fib brackets may have that true connection to trading patterns that it certainly seems to have in nature, as evidenced by the relationship of Fib numbers to the numbers of petals on flowers. Flowers certainly aren't fulfilling some expectations. Whatever the reason, I wouldn't label traders who diligently study price action around Fib numbers as "cranks," but rather as cautious and observant traders.
Candlesticks hold no advantage over the standard OHLC bars, the book's writers intone. Really? If nothing else, the filled-in and colored candle bodies make it much easier to distinguish whether a close was higher than the open or vice versa, I would counter. It's much easier to glance quickly at a chart and see whether most closes have been higher than opens across a certain period or time. It's easier to just plain see than trying to squint at those little nubs on the left and right sides of price bars. If for no other reason, I assert that candlesticks do have an advantage, at least for traders of a certain age.
Still, this book probably costs a third of what most technical analysis texts
costs, it's quick to read and easy to understand, and its tenets are important
for newbies to learn and experienced technical analysts to remember. I recommend
it, even if I'd likely be labeled a crank who studies useless candlesticks by