V.16:11 (513-517): Reversal Formations: Predictive Power? by Alex Saitta
Product Description
Do classic chart formations such as the head-and-shoulders or the double-bottom/double-top hold up to close scrutiny? Here's a look.
A few years ago, I read a Federal Reserve Bank report entitled “Head-and-shoulders: Not just a flaky pattern.” The authors of the piece had rigorously tested the profitability of a trading strategy based on the head-and-shoulders pattern in the foreign exchange market. The results indicated the head-and-shoulders had some predictive power for the German mark and the yen. I was taken by the study’s objective approach to what has always been looked upon as a subjective pattern. I wondered if tests of the head-and-shoulders as well as of the double top/bottom would yield similar results in the Trea-sury bond futures market.
APPROACH
I started with the head-and-shoulders pattern. My definitions and approach are somewhat similar to those used in the Fed’s study. My definitions are:
• Reactionary high: A reactionary high is a local maximum price, which is more than 1 point or 32 ticks above the previous reactionary low.
• Reactionary low: A reactionary low is a local minimum price, which is more than 32 ticks below the previous reactionary high.
A few years ago, I read a Federal Reserve Bank report entitled “Head-and-shoulders: Not just a flaky pattern.” The authors of the piece had rigorously tested the profitability of a trading strategy based on the head-and-shoulders pattern in the foreign exchange market. The results indicated the head-and-shoulders had some predictive power for the German mark and the yen. I was taken by the study’s objective approach to what has always been looked upon as a subjective pattern. I wondered if tests of the head-and-shoulders as well as of the double top/bottom would yield similar results in the Trea-sury bond futures market.
APPROACH
I started with the head-and-shoulders pattern. My definitions and approach are somewhat similar to those used in the Fed’s study. My definitions are:
• Reactionary high: A reactionary high is a local maximum price, which is more than 1 point or 32 ticks above the previous reactionary low.
• Reactionary low: A reactionary low is a local minimum price, which is more than 32 ticks below the previous reactionary high.
FOR THOSE ORDERING ARTICLES SEPARATELY:
*Note: $2.95-$5.95 Articles are in PDF format only. No hard copy of the article(s) will be delivered. During checkout, click the "Download Now" button to immediately receive your article(s) purchase. STOCKS & COMMODITIES magazine is delivered via mail. After paying for your subscription at store.traders.com users can view the S&C Digital Edition in the subscriber's section on Traders.com.
| Take Control of Your Trading. |
| Professional Traders' Starter Kit |
| All these items shown below only $299.99! |
| Click Here to Order |