John Lansing

Chart Pattern Recognition

by John Lansing   03/18/09

When analyzing charts, we look for patterns -- i.e., objects or shapes that call to mind an image of a similar event in the past. Because patterns repeat, we can use them to determine the probability of a certain outcome.

Technical analysis helps us distinguish between what is real and what we think is real -- whether the pattern is a figment of our imagination, an illusion, fact or fiction.

This, in my not-so-humble opinion, is often found in many other types of analysis. That's why I always say "The charts never lie." The only thing that is real is where a price is at the end of the day. Price is nothing more than investor emotions plotted on a grid in the form of lines or candlesticks that show what they feel about that particular stock or security.

It has often been stated that an individual difference in intelligence can only be detected through measures of complex processes such as memory, imagination, attention and comprehension. (I don't know who said it, but I do remember it being said, which is somewhat ironic, because, after all, I am talking about memory. But I digress.)

The Psychology of Technical Analysis

Memory, imagination, attention and comprehension all play a role in the success we have as traders and technicians. I want to explore the importance of being able to build on the strengths of what we remember, why imagination plays a vital role in pattern recognition, attention to object identification (which for years has been used to help aid memory), and why comprehension is roughly the same meaning as understanding.

In the study of technical analysis, let's break down M.I.A.C. (memory, imagination, attention, and comprehension).

1. Memory -- Statistics; the set of past events affecting a given event in a stochastic process.

2. Imagination -- The formation of a mental image of something that is neither perceived as real nor present to the senses.

3. Attention -- Observant consideration.

4. Comprehension -- Logic; the sum of meanings and corresponding implications.