Market Structure and Pattern Recognition in Technical Analysis

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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