Monday, May 6, 2013

The Changing Landscape of Technical Analysis

MetaStock SPRS Series - Week 117 - TechniTrader® Stock Discussion for MetaStock Users - The Changing Landscape of Technical Analysis - May 6, 2013
By: Martha Stokes C.M.T.

Most Technical Analysis books were written in the 1970’s -1990’s, which by technology standards is a very long time ago. As technology has reshaped the Market Participant Groups Cycle and how different groups access and trade or invest in the financial markets, this invariably has altered technical patterns.

Unfortunately most retail traders are still using the older books and reference manuals when they first start learning technical analysis. Years later often 20 years or more, these retail traders are oblivious to the technical pattern changes as they are simply not aware of them or are so focused on searching for the patterns they are accustomed to finding in abundance, that they skip over the new technical patterns that expose pre-momentum and pre-velocity action before price moves.

This can cause late entries, whipsaw trades, and lower profitability. Many retail traders grumble about lower profits and more difficulty finding great stocks to trade. They blame it on what they have been told is happening in the markets which is that volumes are declining for the big exchanges, Dark Pools are taking all the liquidity, and High Frequency Traders are causing all the volatility. Most of this information has been inaccurately reported, and leads to misinformation.

Retail traders, especially those who have been in the market for decades and learned the older style of technical analysis are now at an extreme disadvantage. They have spent a lot of money and time learning technical patterns that are slowly but steadily disappearing, or are altering sufficiently to be unrecognizable.
A prime example is the huge decline in true "Head and Shoulders," and "Inverse Head & Shoulders" Patterns.

To read my full report go to:

H&S tops and Inverse H&S bottoms used to be so common that everyone knew these patterns and could quickly at on them. This created sufficient liquidity for strong momentum runs up and down depending upon the pattern.

Unfortunately, these have been replaced by Platforms, Stairsteps, Velocity tops, and Velocity bottoms. Rarely do you find a true H&S pattern, and often these are distorted and harder to recognize. When they do form, they frequently fail. Instead of indicating a top, it is merely a correction that adjusts out before the pattern can break though the neckline, or the head is so minor that there is insufficient downside point gain to create a full downtrend pattern. Mostly what would have developed into an H&S pattern ends up becoming a Trading Range.

BOBE is the chart example below:

Chart 1

Why have the older style technical patterns changed or slowly disappeared?

The Market Participant Groups have expanded. Where once there were only three Market Participant Groups there are now nine, with a tenth group possibility of emerging in this decade. This massive Market Participant structural change inevitably shows up in charts and the technical patterns.

Each new group with their own unique technical footprint is causing the landscape of technical patterns to change. What once was will not return. As a retail trader, learning these newer patterns is critical to improving your success. Otherwise you will fall further and further behind.

The market structure is continuing to change at an unprecedented pace. This will continue to alter known technical patterns and create new patterns as technology alters how the institutions, Buy Side, Sell Side, High Frequency Traders, Hedge Funds, Small Funds, retail crowd, and others trade stocks, options, and derivatives.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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1 comment:

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