Note from John Murphy

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Dear Fellow Trader:

When I was first contacted by Equis to create a set of tools that identify chart patterns, I was quite skeptical. My roots go back to the old school, and the old school teaches that technical analysis, particularly chart patterns, are subjective. Often we refer to technical analysis as an "art" rather than an exact science. However, I'm the first to admit that computers have taken technical analysis to levels of efficiency in recent years that were previously unheard of. Sophisticated computer software has evolved over the last two decades that allows any aspiring technician to hit the ground running full-speed. In my book. Technical Analysis of the Financial Markets, I discuss two types of technicians: traditional chartists and statistical technicians. Traditional chartists almost exclusively use charts to identify their trades. The term "art charting" is often used to describe this approach because chart reading is largely an art and quite subjective.

On the other hand, the proliferation of computers over the last two decades has spawned a new breed of technicians. I've labeled these statistical technicians. Statistical technicians take raw price data (i.e., open, high, low, close, volume, and open interest) and then crunch it to arrive at objective buy/sell signals. Human emotion and subjectivity are enemies to the statistical technician, so he attempts to remove these enemies by developing a computerized, mechanical trading system. Statistical technicians may or may not use price charts in their work. The traditional chartist relies on visual interpretation, while the statistical chartist relies on mathematical interpretation. Since the computer is so adept and speedy at performing accurate mathematical calculations, it is little wonder that the growth in the number of technical indicators over the last two decades has been tremendous. The old standbys, RSI, Stochastics, Momentum, and others still serve us well. However, new books hit the shelves regularly touting new indicators and trading methods. Industry periodicals come out monthly introducing the latest indicators. New versions of today's popular charting software, including MetaStock, provide dozens of the latest new indicators. These are all great, and have undoubtedly improved the perception and effectiveness of technical analysis. However, with all of these new indicators come confusion. Confusion leads to poor decisions. Poor decisions in the markets lead to lost money. Lost money leads to... well, you can fill in the rest. This leads me back to my original concern. Chart patterns are "visual," and highly subjective, right? If anything in technical analysis is an art, it is the interpretation of chart patterns.

However, the people at Equis International (the makers of MetaStock), showed me that much of what defines a chart pattern is indeed mathematically quantifiable with their software. They pointed out that my book includes sections where each pattern is explicitly defined along with setups, breakouts, price projections, etc. In fact, the folks at Equis were quick to point out that what is written in my book is simply high-level programming code. They call it "pseudo-code". Most of the rules are all there. It was just a matter of putting the rules into a language that the computer understands. This was not an easy task. This product has been in development for almost a year. It took much longer than we initially thought.

Is the product perfect? No. Does it find every conceivable chart pattern that you would spot with your own eyes? No. In fact, some of the example patterns that I label on stock charts in my book are not found by the Chart Pattern Recognition tool (CPR). Do the chart patterns that CPR finds always lead to profitable trades? No. Nonetheless, given (he recognized weaknesses of CPR, it does a surprisingly good job at finding chart patterns. Will this product enhance your trading profits? Yes. But only if you recognize CPR's inherent liabilities and use the tools judiciously. I firmly believe that one can take CPR and trade effectively from it alone, or in conjunction with other trading methodologies. I hope you learn to benefit from these tools. The folks at Equis have done a great job at helping me apply these classical technical analysis trading techniques to MetaStock. The creation of CPR has strongly supported my faith in technical analysis and particularly chart patterns. I look forward to future versions of CPR that build and improve on what has been started.


John Murphy President of Murphy Morris.corn

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