Like many technicians, I began my study of technical analysis with classical bar chart patterns: trusty head-and-shoulders, triangles, wedges and so on. Though I still rely on chart patterns today, not all technicians share my respect for this form of analysis. Some technicians criticize classical chart patterns as being dependent on the imagination of the chartist rather than on objective rules. While perhaps “the essence of charting is subjective interpretation,” what I find even more interesting is the widespread and unapologetic use of classical chart patterns among successful analysts and traders.
In fact, the question of whether chartists assume a reality that does not exist seems almost moot given classical charting’s longevity over the past century. Yet the question remains why classical charting, a technique that appears to involve more exceptions than rules, attracts such a loyal following among otherwise skeptical professionals. What do these analysts and traders actually see when they identify a “classical” chart pattern? The answer I believe does not lie hidden in the minutiae of traditional chart pattern definitions.
More likely the answer is found in a set of general conditions that experienced chartists recognize intuitively. Traditional chart pattern definitions stress the uniqueness of individual chart pattern shapes. For instance, think of the many variations on the “triangle” theme alone: symmetrical, ascending, descending, wedge type, inverted, inverted with rising or descending hypotenuse, continuation, reversal, top, bottom, et al., each with its own time, price, and volume subtleties.
It is my belief that in ascribing this much significance to individual patterns, we also understate the common thread that binds all chart patterns. In the following discussion I will try to describe that common thread by breaking chart patterns into generic components and examining each in turn before assembling them into a single model. My goal is to suggest a more compact and user-friendly approach to classical chart pattern analysis by focussing on the common elements that appear to characterize classical chart patterns in general.
By Daniel L. Chesler, CMT, CTA
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