Technical Analysis: Chart patterns vs. indicators, which work better?

It has been a debate on the feasibility on price action (chart reading) or indicators (moving averages and oscillators) in the world of technical analysis.

Price action is said to be more direct and simple as it will not lag like an indicator does.

On the other hand, technical indicators are highly quantifiable, hence they can be backtested and developed into trading systems.

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Chris Kacher, My personal track record has been verified by big-four auditor KPMG at +18,241%
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Both chart patterns and indicators work well together. The key as we discuss in detailin our books (egs: Trade Like An O’Neil Disciple: How We Made 18,000% in the Stock Market, Wiley & Sons) is that one must develop one’s chart eye when analyzing a chart. This takes much focus and learning. And when one thinks they have figured it all out, the markets will throw a nasty curve ball called “context” which can take years to develop.

For example, in the 1990s, base breakout chart patterns worked great. But since the 2000s, they often fail. Thus, we advised our members that to stay profitable, one must buy on constructive weakness when the stock is near a logical area of support thus minimizing one’s risk. Then when the stock starts to move higher, one should sell and take at least partial profits when the stock’s price gets ahead of itself in CONTEXTwith its chart pattern as well as the general market’s chart pattern. In other words, if the market is in a strong uptrending phase, one should try to stay with their stock and ride its uptrend instead of taking profits early. But in weaker markets, if the stock gets ahead of itself relative to its chart pattern, one should consider taking at least partial profits.

As for indicators, I prefer to take a page from legendary investor William O’Neil’s handbook and use as few as possible. Indicators are like training wheels. They’re useful but only to a point. As O’Neil’s right hand man as a technofundamental analyst and portfolio manager over several years, I was impressed at how few indicators he used because he was the master at analyzing stock charts. Over the years, I too can proudly say I use very few indicators as my chart eye has gone through many evolutions over the last 25+ years. By the way, it was in 1989 when I read his investment classic “How to Make Money in Stocks” that I finally understood the power behind a stock chart.

A last word on indicators: Whatever indicators one decides to use, make sure you have backtested the indicator thoroughly over many market cycles since markets can and do materially change from cycle to cycle. Further, the way in which you use the indicator must work smoothly with your trading style. In other words, if your style is more short-term oriented, using a 50-day moving average may be too long a moving average. If you’re longer-term oriented, using a 10-day moving average may be too short.

I am the co-founder of Virtue of Selfish Investing, LLC and MoKa Investors, LLC. We run the website www.virtueofselfishinvesting.com.