The markets, of course, have also changed since the beginning of technical analysis and the first recognition of patterns, and with this change, patterns have changed and become less accurate. First, the proliferation of technical knowledge has led to the recognition of specific patterns when they occur. Of course, once a pattern is widely recognized and acted upon, its effectiveness diminishes. Thus, patterns in widely traded securities tend to be less accurate than in those quiet trading securities that few traders watch.
In the stock market, ownership has become concentrated in relatively few hands that tend to act in concert. These “hands” are the institutional holders of securities. They tend to act together when news is announced; thus, by their large positions and anxiousness to get in or get out, they cause patterns to self-destruct. Although it is difficult to prove, when a large institution is the dominant owner of a stock and has knowledge of technical principles, there is a temptation to “manipulate” a chart formation and cause false breakouts. This can cause havoc with the short-term trader who is watching the same patterns develop.
Finally, the advent of derivatives in large quantities has influenced the price and volume action in individual securities for reasons other than the prospects for the underlying company. Addition or deletion from a market index or basket can suddenly introduce buying or selling unrelated to the pattern developing.
Box 15.1 For Further Reading
There are many good reference books devoted to the study of patterns in market prices. Some of these are listed here.
Bar Chart Patterns
Encyclopedia of Chart Patterns by Thomas N. Bulkowski
How Charts Can Help You in the Stock Market by William Jiler
How Technical Analysis Works by Bruce Kamich
Profits in the Stock Market by H. M. Gartley
Technical Analysis by Jack Schwager
Technical Analysis Explained by Martin Pring
Technical Analysis of Stock Trends by Robert Edwards, John Magee, and W.Bassetti
Technical Analysis of the Financial Markets by John Murphy
Point-and-Figure Patterns
Point and Figure Charting by Thomas J. Dorsey
Study Helps in Point & Figure Technique by Alexander Wheelan
The Chartcraft Method of Point and Figure Trading by Abe Cohen, Earl Blumenthal, and Michael Burke
The Definitive Guide to Point and Figure by Jeremy du Plessis
Trading—Short-Term Patterns
Connors on Advanced Trading Strategies by Laurence Connors
Dave Landry’s 10 Best Swing Trading Patterns and Strategies by David Landry
Encyclopedia of Candlestick Charts by Thomas N. Bulkowski
Japanese Candlestick Charting Techniques by Steve Nison
Long-Term Secrets to Short-Term Trading by Larry Williams
Market Wizards by Jack Schwager
New Concepts in Technical Trading Systems by J. Welles Wilder, Jr.
Street Smarts by Laurence Connors and Linda Bradford Rashke
Trading Systems and Methods by Perry J. Kaufman
Trade Chart Patterns Like the Pros by Suri Duddella
Source: Kirkpatrick II Charles D., Dahlquist Julie R. (2015), Technical Analysis: The Complete Resource for Financial Market Technicians, FT Press; 3rd edition.
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