William Eckhardt (see: “The Complete TurtleTrader“), in attempting to get people to see the flaws in some trading strategies, once offered:
A price chart is an attempt to model relevant aspects of price change. Price change is not linear displacement, whether vertical, horizontal or oblique. Nonetheless, price change can be represented as vertical displacement and time elapsed as horizontal displacement. Such a model, however, invariably supports relationships that does not correspond to anything in the original process. The angular inclination of a trend on a price chart is a visually striking feature of this representation. Such angles have no intrinsic meaning for the price series, but this is one of the many factors (along with our facility for pattern recognition and wishful thinking) that contributes to our interpreting more from price charts than rigorous testing reveals is there.
Let me break down some of what Eckhardt is driving at. For example, new traders always talk of charts. Charts, charts, charts. Rarely do they talk of price. Many new traders think they are trading the “chart” when in reality if they want to be a great trend follower they should trade “price”. Eckhardt, in his best academic jargon, was basically saying, “don’t look for patterns where there are none!” Meaning if you are looking for angles embedded in a price chart for some predictive value or if you are developing some other arcane analysis, stop. The three best indicators? Price, price and price!
November 30th, 2009 at 4:52 am
This “chart angles” is one of the most irrelevant “patterns” out there. I realised this when I started reading TA books. When trying to reproduce charts in Excel, I could see that the angle would change - just by compressing/expanding the horizontal axis…
Did not take me long to understand it was b***cks ;-)
November 30th, 2009 at 2:22 pm
Eckhardt’s comments are absolutely true. Many “technical” traders I’ve met say they are “trend followers” because they buying and selling based on some “support and resistance” lines drawn on a chart. They are sadly mistaken!
For starters, there is no consistency to their methodology - which of course means an absence of back testing and system validation. This type of “technical analysis” is basically the equivalent of flying blind.
That’s why one of my principal trading rules is:
“Assume nothing and test everything!!”
November 30th, 2009 at 4:52 pm
What differentiates the winners from the losers is the ability to know and follow fixed consistent rules. This isn’t a new idea but few really appreciate it.
November 30th, 2009 at 5:33 pm
That’s true Jez. Anyone can create any almost angle they want by adjusting the x or y axis. I think the most basic misinterpretation of the chart is that most people view a rising chart as bearish and a falling chart as bullish. But a statistical analysis of price tells us something different.