V.7:5 (150-153): Traditional chart analysis: A neglected tool? by Thomas Aspray
Product Description
Traditional chart analysis: A neglected tool?
by Thomas Aspray
With the virtual explosion of computerized technical analysis over the past few years, some basic methods of analysis are often forgotten or at least neglected. I confess that I have even contributed to the outbreak of "oscillatoritis" by focusing my research and writing on developing new, computerized technical indicators. Despite this, traditional chart analysis does play an important role in my own analysis.
Traditional chart analysis is a proven method of analysis and I feel it can be very useful, even for the sophisticated trader. The two primary advantages, in my view, are the additional discipline it can add to a trading plan and the ability to calculate reasonable price objectives and protective stops from the chart formations.
In the ideal head and shoulders top (Figure 1), the left shoulder usually has the peak volume. Volume then decreases during the formation of the head, indicating that demand is weakening. Volume, typically, will be weakest during the development of the right shoulder. On the breakout below the neckline, the volume should expand as sellers take control of the market. The objective after the breakout is the distance, D, from the peak of the head to the neckline.
An ideal double top (Figure 2) has peak volume during the first drive toward resistance. On the second attempt to break resistance, volume is low, which indicates demand is weak. After the breakout below the support line, the minimum objective is the distance, D, from the peak in prices to the support line.
With the virtual explosion of computerized technical analysis over the past few years, some basic methods of analysis are often forgotten or at least neglected. I confess that I have even contributed to the outbreak of "oscillatoritis" by focusing my research and writing on developing new, computerized technical indicators. Despite this, traditional chart analysis does play an important role in my own analysis.
Traditional chart analysis is a proven method of analysis and I feel it can be very useful, even for the sophisticated trader. The two primary advantages, in my view, are the additional discipline it can add to a trading plan and the ability to calculate reasonable price objectives and protective stops from the chart formations.
In the ideal head and shoulders top (Figure 1), the left shoulder usually has the peak volume. Volume then decreases during the formation of the head, indicating that demand is weakening. Volume, typically, will be weakest during the development of the right shoulder. On the breakout below the neckline, the volume should expand as sellers take control of the market. The objective after the breakout is the distance, D, from the peak of the head to the neckline.
An ideal double top (Figure 2) has peak volume during the first drive toward resistance. On the second attempt to break resistance, volume is low, which indicates demand is weak. After the breakout below the support line, the minimum objective is the distance, D, from the peak in prices to the support line.
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