Nicholas,
False breakouts, breakdowns, whipsaws, bull traps, bear traps, etc have always been part of TA. Common chart setups are like any other market inefficiency, i.e. when the "crowd" discovers them, the popularity forces too much dumb money onto one side of the trade and closes the system inefficiency that allowed easy profit from the setup in the first place.
But this still doesn't reduce the value of TA. Smart traders, whether they use TA, the tape or even fundamentals adjust their tactics ahead of, behind or against the crowd to take advantage of the new inefficiency that the mass participation creates.
There are also two limitations to manipulation: first, it tends to be time-frame and strategy specific. So traders can quickly adapt by adjusting their holding period (and the related charts they use to make decisions) and methodology if a strategy stops performing as expected. Second, manipulation can bend but not break the TA. Tools like candlesticks filter out a lot of market noise so that the underlying primary direction becomes clear.
Here's an example: everyone is learning Fibonacci. So there's a tendency by the unwashed TA types to jump in right at a 62% retracement. But one of the best trades these days is to lag the crowd at those levels, let them get shaken out with a whipsaw down to 70-75% and enter the trade as soon as the market jumps back across the 62% support line. As a rule, shakeouts can only burn one side of the market at a time. The move to 75% cleans out the "crowd" and allows the underlying market direction to reassume control.
Alan |
