Charts are a great way of predicting the past.
In classic theory the past doesn’t affect the future. However this can’t be completely true. Technical analysis is controversial. When you start projecting the past into the future you can be easily lead astray. Drawing lines on old charts is also misleading as by some magic of human imagination there are always lines that perfectly fit a long period of time and as such would have been most useful.
I use charts but not in a mechanical way.
If you could use a time series to predict the future it would have been exploited to death but the building of mathematicians employed to help bans know their risks. Even so there are occasionally times when charts give a strong steer on what happens next.
This is normally when the forces involved are two powerful to be flattened out by traders. A good example of this is a fat finger ‘flash crash.’ If you see one kicking off you can traded the bounce when it comes because its not instantaneous.
This goes for crashes too which are just the same thing on a bigger time base. Currencies fixed by governments are another example and this is the subject of my article. When a chart goes into an unnaturally tight channel, the ‘breakout’ tends to go a long way, either up or down.
This happened to the Nikkei before its huge run up and happened with oil as I wrote a few weeks ago.
It is now clear and present in the US dollar UK pound currency pair. Here is the chart. I’ve longed this as it looked to break out today but I might be too early and wrong, however it looks strong that when it does break out, the pair will run a long way.
I think the move will be 4-5c, which is a mile in currency terms, so keep an eye on it. The thing about trading a situation like this is, if the price reverts into the tight band, losses are minimized by the thinness of the range.
That’s the idea, but of course if the past doesn’t effect the future it could go anywhere. However there is no doubt that currency is effected by central government policy so the random walk would appear to be badly impacted by this reality.