2004issue C041
Evaluating chart patterns against price objectives
Treat chart-pattern study as a check rather than a blanket forecast. Define a price-objective from the start of the formation, see whether later price reaches it, and keep a short list of setups that fit the process.
- A chart-pattern implies a price-objective measured from the start of the formation, and later price does not always reach that target.
- Watching patterns form can show a lot about direction without showing everything, because markets remain unpredictable.
- A tiny-pattern can still be used when the price-objective sits close to the start of the setup, even if it may be less reliable than expected.
- It is better to act on a few chart-pattern types that fit the process and to rely on money-management rules rather than on pattern variety alone.
When support gives way after a rally
The archive note described the Nasdaq as having broken key support after a stretch that had looked like a sustained rally. The S&P 500 and the Dow Jones Industrial Average were moving toward similar conditions.
The same note treated markets as unpredictable. Regularly watching price patterns form, it argued, can show a lot about direction without showing everything.
Testing the price-objective
A featured evaluation summarized in the note concluded that chart patterns do not always reach a stated price-objective. Only some pattern types were presented as often doing so.
The commentary added that a price-objective need not sit far from the start of the formation. Very small chart patterns can still be used even if they may be less reliable than expected.
Tiny-pattern forms and a short list
A companion piece on well-known tiny-pattern setups was framed as a way to examine how and when those short formations might be applied.
The archive commentary argued that there are many ways to use chart patterns, that no one can apply all of them, and that it is better to identify a few that fit a given trading process.
An interview subject was described as acting on a small set of favorite patterns when they form. Outcomes were attributed largely to strict money-management rules rather than pattern variety alone.
All readings on this track · 25 readings
- 1986Construct a decision procedure that revises itself
- 1989Finish the volume checklist before scoring the breakout
- 1989Constructing supervised forecasts on moving averages
- 1991Candlestick labels as stacked construction tests
- 1992Walk-forward evaluation of weekly price-change patterns
- 1993RSI price pattern templates and open interest
- 1994Constructing a dual-net day-ahead index direction forecast
- 1994A clocked stochastic second crest with a window-high stop
- 1996Volatility-ratio, inside-day and narrow-range-4 entry construction
- 1998Sliding-window correlation for cup-and-handle construction
- 2000Constructing rectangles for breakout hypotheses
- 2001Turning one candle into a ranked numeric object
- 2002Fuzzy-scored chart patterns as testable rules
- 2002From hot-zones to an open-close-matrix
- 2003Volume pressure and a band-clearing breakout case
- 2004Evaluating chart patterns against price objectives
- 2004Cobweb turning points from price structure
- 2005Hybrid decision trees and pattern recognition for trend rules
- 2005Two-bar zone codes for testable pattern systems
- 2005Price bar pattern construction and next-bar frequency
- 2008Observe markets before following pattern or system rules
- 2012Treat a four-leg Fibonacci completion as an unpaid hypothesis
- 2014Hidden three-channel regression signals for stock and call option entries
- 2014A shared daily-chart-level framework for session trades and swing holds
- 2015Condensed candlestick signatures