Technical analysis involves using historical price and volume data to predict market movements. It can be applied in markets ranging from wheat to the latest speculative craze, cryptocurrencies. One Bitcoin pundit, for example, recently discussed the appearance of an “inverse head and shoulder breakout” after the digital currency surged 10% within 24 hours, claiming that “…BTC is trading well above the neckline hurdle of $15,550… prices could rise to $18,600 (target as per the measured height method) over the weekend”. Others have enthusiastically cited the prospect of Fibonacci retracement as a trading signal.
As futuristic as divining the future of digital currencies may seem, attempts to do something similar in other financial markets have a storied past. Primarily relying on intuition and hand-drawn graphical representations of data, early “technicians” were at worst con artists. At best, their approach was crude and lacked the rigour or science of modern systematic investment managers, which use the latest technological and statistical techniques to scour petabytes of data.
Technical analysis pioneers had the foresight, however, to appreciate the opportunities for profit created by crowd psychology. They also instigated the use of charts to navigate peaks and troughs. The series displayed in the GIF below, which has been taken from Winton’s archive, exhibits some of the more common – and more unusual – price patterns identified in financial markets, from “head and shoulders” and “double bottoms” to “rising scallops” and the “reverse horn”.
More here – Winton Capital.