FINDING CONSISTENT PATTERNS (part 1)

A price chart is often considered a representation of human behavior. The goal of any chart analyst is to find consistent, reliable, and logical patterns that predict price movement. In the classic approaches to charting, there are consolidation forms. trend channels, top-and-bottorn formations, and a multitude of other patterns that can only be created by the repeated action of large groups of people in similar circumstances or with similar objectives. As of this date, quantitative studies relating the psychology of behavior to the reliability of chart formations have not been reliable. Traditional trading techniques found in the most popular stocks and commodities literature may themselves be the cause of the repeated patterns. Novice speculators approach the problem with great enthusiasm and often some rigidity in an effort to stick to the rules. They will sell double and triple tops, buy breakouts, and generally do everything to propagate the standard formations. In that sense, it is wise to know the most popular and well-read techniques and act accordingly.
Speculators have many habits which, taken as a whole, can be used to interpret charts and help trading. The typical screen trader (not on the exchange floor) will place an order at an even number, from 50 to $1.00 per bushel in the grains, 10 to 50 points in other products. This pattern far outweighs the number of orders entering the market to buy at odd numbers, for example the S&P at 863.50 rather than 863.35 or bonds at 105 16 32 instead of 105 19/32. The public is also known to enter into the bull markets always at the wrong time. When the major media, such as television news, syndicated newspapers. and radio, carry stories of outrageous prices in cattle, sugar, or coffee, the public enters in what WD. Gann calls the grand rush, causing the final runaway move before the collapse; this behavior is easily identifiable on a chart. Gann also talks of lost motion, the effect of momentum that carries prices slightly past its goal. A common notion of the professional trader who is close to the market is that a large move may carry 10% over its objective. A downward swing in the U.S. dollar/Japanese yen from 1.2000 to a support level of 1.1000 could overshoot the bottom by.0100 without being considered significant.