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Traditional Methods of Technical Analysis and Day Trading

Since traditional technical analysis has been so popular for so many years, many futures traders are very familiar with the application of such principles as chart formations, trend line penetrations, price patВэterns, and the many different methods of interpretation associated with these formations. Many of these patterns have been used with great sucВэcess by traders over the years; however, there has been a steadily growВэing belief in recent years that these chart patterns are not necessarily reliable and that they are, in many cases, subject to considerable interВэpretation. Traders who claim to be objective and scientific reject any method or trading technique which cannot be fully tested.

Clearly, the primary cause of the growing tide of counter-chart-analyВэsis sentiment is that many of the chart formations and patterns cannot be fully or thoroughly tested by computer. Nor can hypothetical results be sufficiently quantified to instill the degree of confidence which so many contemporary traders demand. My personal opinion on this matВэter, as you may well have gathered from my comments throughout this text, is that computer testing is considerably overrated and that, in the final analysis, it does not necessarily guarantee profitable results.

I have deemphasized the value of computer testing and reemphasized the value of individual trader's skill as a critical variable in the formula for profВэitable day trading. In fact, it is certainly not an unacceptable extrapolation to extend these comments to all types of trading. With this in mind, I cannot include myself among the many who denigrate the value of traditional technical indicators. I believe that there are many short-term and day-trading tools which are derived from traditional chart analysis. This book is not intended to serve as a compendium of traditional tools applied to day trading. So many excellent books have been written on the subject that anything I could add might be redundant. I will spend just a little time, however, illustrating some of the methods to you so that you may make your own decisions and/or be prompted to do your own research, whatever form that may take.

The most supportive aspect of traditional chart analysis for day tradВэing rests in the fact that many day traders on the exchange floor use traВэditional chart indicators in their trading. Experience and keen observaВэtion have taught me to be a traditionalist with respect to market analysis and trading.

Although this may seem, to many of you, to be incompatible with the tasks and objectives of the day trader, my work suggests that there may be many profitable opportunities to apply traditional charting principles in the day trading. As long as you are the type of individual who is willing to accept visual evidence as opposed to hard scientific validation, then this chapter may be very helpful to you. If, however, hard science and definitive answers are what you seek, then I suggest you skip this chapter and move onto something else.