Why Favorite Technical Chart Patterns Are No Longer Reliable
Is Technical Analysis Broken?
Many traders are complaining that their favorite Technical Patterns no longer work, or work some of the time but fail more often than not. Technical Traders who have relied upon Technical Analysis patterns that were identified, named, and written about starting in the 1970’s are finding these once very consistent patterns are now questionable.
Is Technical Analysis broken as many traders claim? Can Technical Analysis still be used or should you just go back to guessing, or abandon stock trading for some other riskier trading instrument?
No, it is not broken and in fact it is stronger than ever. What is broken is the fact that Technical and Retail Trader training for Technical Analysis has not kept up with the changing Market Structure. Why favorite technical chart patterns are no longer reliable is due to changes including new order types, new venues, giant Institutions using Dark Pools in Alternative Trading Systems ATS, High Frequency Trading Firms HFTs with millisecond trading capabilities, the Retail Broker Oligopoly, Professional Traders First Of Day FOD - End Of Day EOD, and many more. These structural changes to how the professional side trades has left most Retail Traders far behind in the dust, with Technical Analysis training that is outdated and not keeping up with the patterns now common in stock charts.
Recently the Stock Market encountered a new short term trading condition called a “Void Trading Condition.” Unfortunately the retail side of the market had no idea that the giant institutions automated orders which control vast quantities of stock and liquidity, had slowed down so much a void occurred. That meant many stocks whipsawed, reacted strangely, and older style technical patterns failed.
It is not Technical Analysis that needs repair, nor should Retail Traders stop using it.
Technical Analysis works, however the patterns have changed because how professional trading has changed. Learning the new Relational Analysis which incorporates more data in to stock chart analysis is the answer. Relational Analysis builds upon the foundation of training from Technical Analysis, and advances the trader’s skills to a professional level.
See the chart example below.
The stock formed a short term “Basing Bottom™” which is created when giant Institutions using Dark Pools are quietly accumulating a stock, with a specific price range to buy or stop buying. This quiet accumulation using Dark Pools is one of the reasons why favorite technical chart patterns are no longer reliable. The automated order type they use is generally called a “Time Weighted Average Price” TWAP order. There are numerous variations of this professional only style order, which can be placed via Alternative Trading System venues which are Over-the-Counter OTC orders. These orders search for liquidity, and pull orders from everywhere because these are huge lot orders.
What happens when HFTs discover this accumulation is a Shift of Sentiment™ from selling to buying, and the stock moves up with momentum for a few days. This is followed by Smaller Funds of which there are many thousands. Smaller Funds use automated orders also, however their orders are sent to exchanges and other venues rather than Dark Pools. Their order type is based on Volume surges and are called “Volume Weighted Average Price” VWAP orders, so once the HFT creates a volume surge then Smaller Fund orders trigger. Smaller Funds lack the massive buying power of the giant Institutions, and must rely on the retail crowd or professional traders to move price.
Their buying is the final phase of the run up out of a “Basing Bottom” formation. The stock forms a “Flat Top™” formation, which is a short term sudden top after Professionals start taking profits. Professionals taking profits sometimes trigger HFT orders, and can create sudden down trend runs or gap downs which did not happen for this stock.
Now the action is a VOID pattern, because there is a lack of both buyers and sellers of any importance. So the stock is forming many small Doji candlesticks or tiny Indecision Day candlesticks, and has no momentum energy to drive it upward.
Relational Analysis™ helps traders interpret what is going on in a stock chart beyond the basics. When you understand the dynamics behind the price action, traders can decide when to enter, how to enter, and when to take profits for significantly higher profitability with very low risk.
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Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.
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