This article written by Thomas Kaschel was originally published in the November 2011 issue of Traders' Magazine.
- Mr Thomas Kaschel is a CIIA (Certified International Investment Analyst) and holds an MFTA (Master of Financial Technical Analysis). Until 2009, he was an asset manager at a savings bank and in this position was responsible for developing trading strategies and optimising portfolios as part of asset allocation. Since 2010, he has been an independent trader and part-time lecturer at universities teaching courses related to banking and capital-market issues.
In the first part of this series (TRADERS ́ 10/2011), you learned the basics as well as the construction of point and figure charts. In Part 2 we will now be dealing with patterns. The human brain has evolved to acquire the ability to recognise patterns. These patterns, which include the chart formations, form the basis for decisions. Against this background, it makes sense to closely examine the patterns in point and figure charts, especially since they partially differ significantly from the patterns of other types of charts.
In the last issue, you learned that a buy signal occurs when the high of the last X-column is exceeded. A sell signal is indicated when the price falls below the last column of O ́s. It would certainly be possible to build a simple trend-following trading system on this basis. However, in order to properly assess the quality of the signals, it is useful to look at the market environment in more detail. This task can be accomplished by the identification of chart patterns.