Chart Analysis Had 70% Strike Rate This Year
This time of the year is usually the time to look forward with forecasts for the next year. For us, it’s time to look back. Trading the market is a hazardous business. It’s based on analysis of the market and the assessment of probability outcomes.
This is the most important difference between forecasting and prediction. Forecasting uses the higher probability situation in an attempt to project future price action and acts in anticipation of this. When we see the signal we can forecast the action for a selected period of time.
Prediction carries a high level of certainty about the occurrence of events at a specific time. This leaves little room for probability, although there are times when such predictions match the co-incident events.
So when we look back from December 2010 to the end of November 2011 we ask the question; How did we do? What is the record of success and failure?
We wrote 52 columns during this period. Of those, five columns were about general issues such as how to draw accurate trend lines and did not involve any outlooks, chart analysis or price targets. This leaves 47 columns where the analysis identified the higher probability outcomes and provided targets.
Our success rate on these calls – where the index or price moved to reach the targets identified in the article – was 70.29 percent. Sometimes targets were exceeded. Fund managers feel very happy if they can get around 55 percent correct calls. Our rate of 70.29 percent is above industry standard and is around the same level as our 10-year average in our personal trading.
The best calls were two times with the Dow , the Sensex and two times with the euro/dollar . The first call with the Dow was the identification of the head and shoulder pattern in June. The fall in the Dow achieved and exceeded the initial downside targets prior to developing a rebound.
The second call on the Dow was the conditions of the L-shaped recovery and the trigger rises that identified the genuine breakout.
The Sensex call was the identification of the long term down sloping triangle, both as a bearish factor and in terms of setting downside targets. These targets are being achieved.
The volatility on the euro/dollar chart makes analysis difficult. We called the $1.49 May high. We also called the current downtrend lows. This analysis was based on the chart pattern developments.
The worst calls – the ones where the market moved in the lower probability outcomes, was our calls for an up trend continuation with gold . The change in margin requirements a few days after the column was posted created a price plunge.
It is obviously better to get as high a percentage of calls correct as possible. However, this is not where trading success is found. Trading success comes from three factors. The first is to structure the analysis so you can recognize very quickly where the outcome is at the lower end of the probability scale. The second factor is developing the discipline to act quickly on stop loss. The third factor is the ability to quickly apply new analysis to recognize the changed circumstances.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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