Transcript: Peter Brandt – Episode 3 – Classical Charting & Technical Analysis

Featuring: Peter Brandt

Published date: 17th of May 2017

Length: 00:51:01

Synopsis: In Episode 3 of Charting Masterclasses from a Trading Legend, Peter Brandt

delves into the world of classical charting and technical analysis. Peter explains what charts
can tell you and importantly, what they can’t, with a lesson on the major pattern formations
he looks for and the crucial ability to spot false breakouts and practical examples of how
price trend action has followed chart patterns in some of the major commodity and foreign
exchange markets.

Topics: Psychology, Technical Analysis, Trading

Tags: Factor, Trader, Classical, Charting, TA

Video Link: https://www.realvision.com/channel/realvision/videos/

5982e8f2e4624f27b3701d5969216f15

The content and use of this transcription is intended for the use of registered users only. The transcription
represents the contributor’s personal views and is for general information only. It is not intended to amount
to specific investment advice on which you should rely. We will not be liable to any user for any loss or
 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
damage arising under or in connection with the use or reliance of the transcription.

——————————————————————————————————————

Peter Brandt: I have been a professional, foreign exchange, and futures trader dating
back to 1975 at the Chicago Board of Trade. I am a classical chartist. I've used price
charts to earn my living during all of these years. And in the process, I've learned a lot of
lessons, some the hard way. And it's really those lessons and that perspective of all of these
years training that I'd like to bring to you. I'm Peter Brandt. I am a classical chartist.

My guess is that those of you who are watching this video today belong to one of two
groups of traders or market participants. The first group among you are naysayers in the
idea of charting. You think charting is some form of voodoo. The second group among you
see that there is benefit, there's value in charts. Charts help provide you some sort of edge
in your trading.

To the naysayers among you, there is very little that I can say. It's not going to be my
attempt to persuade you that you're wrong. But what I'd like to do is just give you some
sort of idea of what I see as the benefit of price charts to help give you a little bit better
understanding of my thinking. You've heard that most price charts fail, that you're a believer
that price charts do not accurately forecast price.

And I have made my living from charting for more than 40 years. And I will tell you, you're
absolutely right. Price charts do fail. They fail much more often than they're correct. And
price charts, in my opinion, do not provide a great tool for price forecasting. But here is
what I see as the benefit of charts. And it'll give you a little bit better feel for how I view
this whole world of classical charting principles.

The first thing charts show me is where a market has been, where a market is now, and
perhaps the path of least resistance for a particular stock or forex pair or futures contract.
And that information in and of itself is very, very valuable. The second thing that charts
show me, if they set up just perfectly, is that there may be some accumulation or distribution
of shares or contracts by very strong-handed people at a certain price level, that we see
signs of accumulation or distribution. That in itself is very valuable to me.

Then the third thing, which for me is really the real value of charts, is it can indicate for me
the opportunity for a very, very highly skewed, asymmetrical reward to risk trade, a point
in the history of price where I can place a bigger bet than normal with a limited risk. And
that, to me, is where the edge of charting comes from.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
I would now want to address some comments to those of you who would consider yourself
chartists or believe that charting has some benefit to the way that you trade, the way that
you deal with the markets. Keep in mind, I'm a classical chartist. My training and my frame
of reference is the book written by Richard W. Schabacker so many years ago.

It's not my intent here to persuade other chartists that my way of charting is right. I have
the feeling that if it works for you, that's great. Whatever works for a trader, that's where
a trader needs to go. But I'd like to talk a little bit about how I view charting. When I'm
thinking about my own charting, what are some of the things that would define that? And
so let me run through some of those things.

Charting is an interesting thing. If you get in a room of 10 different chartists and show them
a chart, you're going to get about 15 different opinions. And so charting is just not always
one particular way of looking at a market. There can be a variety of ways.

I give you some highlights of my approach to charting, dating back to 1981. I trade
primarily futures and forex markets with a little bit of equities. I'd say 50% of the trades I
do are in the global futures markets.

And I trade futures markets in all continents. 40% are in the spot forex markets, primarily
the big currencies, the Australian dollar, British pound, and so forth. I don't get into the
exotic currencies, Brazil or South Africa. And about 10% of my trading is based in equities.
And that's global equities. But again, my primary emphasis has classical charting
principles.

I look at weekly charts. That's the basis of my opinion is the weekly charts. And I use daily
charts for timing. And I try to keep things simple. I try to keep as few lines on a price chart
as I possibly can.

I know that on Twitter, people frequently comment on the fact that I use a white background,
my goodness. And nobody uses white backgrounds anymore. But my charts, I have a white
background. I draw very few lines because I think simplicity is the way to go. My approach
to charting, classically, is based on the book written in 1933 by Richard W. Schabacker.
I would consider myself to be a Schabacker disciple.

There are some secondary things that I look at in from a technical standpoint. I pay attention
to the CFTC commitment of traders reports, which show the profile of positioning by small
speculators, large speculators, and commercial interests. To me, I don't pay week to week

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
attention to that data. But I do pay attention to that data if it's near record historical all-time
levels. Then that is a factor that I take into account.

I do look at a simple moving average, normally just a 14 day moving average. I don't get
into whether the moving average needs to be adjusted. It's a simple moving average. I look
at the ADX indicator. That is just about the only indicator that I pay attention to.

And I also pay attention to what I consider to be analog years. That is an important way
to look at markets. The markets tend to behave in similar manners over time. And if you
can find a market that is starting to act like some market from 10 or 20 years ago, you
study that market from 10 to 20 years ago and try to anticipate what might come next.

There are a number of techniques that basically I pay no attention to. And it's not my intent
here to create controversy or say that some of these techniques are not useful. Because
again, if they work for you, I think that's wonderful.

These are just indicators that I just do not believe in, quite frankly. And it would include
Elliott wave theory, I pay no attention to. I don't pay attention to cycles. I do not like
indicators, quite frankly, except for ADX. As far as I'm concerned, an indicator is really a
derivative of price. And so why should I study a derivative price if I can study price itself?

I don't believe in Gann. I don't look at Fibonacci retracements. I don't pay attention to
seasonals. And I particularly almost detest what I call Star Wars charting. And every once
in a while, I'll see a chart on Twitter that's got so many lines, I get dizzy. It looks like
somebody wants to travel into some other galaxy far, far away. And so I refer to them as
Star Wars charts.

So that gives you a frame of reference to at least some of the profiles that I use to try to
think of myself as a chart speculator.

With some of these things as background, now I'd like to do what I'm going to call wading
into deep waters. And have some comments about charting that a number of you chartists
probably will find quite objectionable and disagree with me. But this is my video. So I'm
going to present my views on this.

But these are beliefs that I have on the concept of charting that I think create some problems
for chartists, things that I see about charting that I don't happen to agree with. I do not
believe that charting has a value for comprehensive market analysis. And I see or read
what some other chartists are doing from time to time.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
And what I see is they attempt to use charts to come to a comprehensive understanding of
a market. And I, quite frankly, think that most markets most of the time defy understanding
from a classical charting point of view. And so I do not see charting as being of value for
having a comprehensive understanding of what the markets are doing.

I hear people refer to the fact that they are going-- they'll say, go home and study their
charts. And I kind of think to myself, study your charts? The idea that you're studying your
charts would indicate that charts, if you just look at them closely, will reveal all things about
all markets.

And I just don't see that as the reality of using charts for the purpose of market speculation.
To me, I'll look at a chart for two seconds. And if I don't see something in two seconds of
looking at a chart, I move on, because I don't, quite frankly, believe that the chart's
attempting to tell me anything.

Another thing about charting is that I really see valid chart patterns, significant valid chart
patterns, that provide a speculative opportunity as the exception, not the rule. I go by the
frame of reference that may be, in a given chart, let it be the S&Ps, or soybeans, or the
price of London cocoa. If I can get two valid chart patterns in those markets in a year, that
may be about what I'm looking for.

And so for me to go in and say, I need to have a constant, although ever-changing, opinion
of the S&P market based on charts, I think to me, that's lunacy, quite frankly. There's one
thing about charting that I find particularly interesting, and that is something that I would
refer to as attempting to create a global macro narrative based on a chart. I see comments
quite frequently in the social media, where somebody might say, well, I think the price of
gold based on this chart is going to do this. And other people pipe in and say, well, that
means that the price of oil will do this, and the dollar will do that, and the stock markets
will do this, is what they're trying to do is they'll look at a single chart and attempt to create
some sort of global macro narrative based on a single chart. Well, what if you read the
chart wrong? Then your whole global macro narrative is wrong. And so it's something that
I attempt to prevent myself from doing.

Another thing is that I have found, charting can be accurate for one period of time and
then become quite inaccurate another period of time. My general rule of thumb is maybe
four months out of the years, chart patterns will be reliable. The other eight months out of
the year, chart patterns will be relatively unreliable. And so I expect this cyclic reliability of
chart patterns to take place.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
Another factor of charting, especially for a new coming chartist, for newbies to the business
of charting, they'll take a chart and they'll try to identify every pattern on a chart. And in
the process, they misdiagnose charts. I go by the principles of Richard W. Schabacker. To
me, those are cardinal rules about charting.

And many of the patterns that I've noticed on Twitter or various chart forums, they're
drawing in patterns that, quite frankly, just don't meet the rules of those chart patterns,
whether it be a head and shoulders, or how a trend line is drawn, or how a wedge is
drawn, is I see how they're drawn and I look at it. And they just do not meet the conditions
that Richard W. Schabacker laid out for those patterns.

Another danger that I see among chartists is they become dogmatic. Again, I come back
to a saying that I use quite frequently, and that's strong opinions, weakly held. I may have
a strong opinion on the market. But if I have a position in that market that is not consistent
with that in terms of profit or loss with the opinion of the market, I need to change my
opinion of the market.

I get criticized quite frequently on Twitter and StockTwits for having a negative opinion on
one market one week and a positive opinion on a market the next week. Well I think traders
need to be flexible. They can't be dogmatic.

Dogmatic opinions normally lead to large losses, because people become convinced
they're right. They dig in their heels and they become dogmatic on what they believe a
market's going to do. There's one aspect of charting, classical charting anyway, that I
would warn people against.

In the first place, I am not a believer in day trading. I think the odds against someone being
successful in day trading are quite small. As a matter of fact, I saw an article this last week,
which included a number of research projects that have been done, either scholarly
research projects or reports from various exchanges around the world, that said that only
1% of day traders are consistently, regularly profitable in the markets.

Day trading is a losing proposition. I'm sure there are day traders among you who are
quite profitable. And that is the case. I know some excellent day traders. But far too many
people get into the markets thinking they're going to be day traders. And classical chart
breakouts, in particular, are not a very reliable way to become a day trader.

I do trade classical chart breakouts. But I do on weekly charts and on daily charts. Daily
charts classical charting is not an effective way to trade the markets, because even on daily

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
charts, there are more false breakouts, it seems, these days than there used to be. I go back
into the late 1970s and 1980s when a market would break out from a chart pattern, and
it was pretty reliable. You could almost bet that the chart pattern would fulfill the implications
that it had.

Where today, I am seeing far more false breakouts, premature breakouts, erratic breakouts,
than we did in the past. I've had to adjust the way I trade based on that. I pay less attention
to the spindles on candlesticks because I think that they're driven by high frequency traders
running stops. I pay much more attention to weekly charts.

And I especially pay attention to closing price charts. Closing prices are the most single
important price of the day in anything that is traded. And the Friday close is the single most
important price of the week for anything that is trading. So I want to be paying attention to
that.

Another point that I'd like to make about charting and that deals with the subject which I
call morphology, that charts morph. That what we may see as a particular pattern one day
will break out and fail and then morph into an entirely different pattern. And I think that's
especially true because I look at chart patterns that are somewhere between 10 and 26 up
to one year long. That's kind of my sweet spot is a chart pattern that's about 20 to 26
weeks long.

And if I really study a chart pattern that's 26 weeks long, what I find is that that chart
pattern, the tradeable chart pattern for me, is made up of a whole number of smaller,
shorter duration chart patterns that failed, that failed immediately or fail to meet the
expectations that that smaller chart pattern would have.

And so charts tend to morph over time. You cannot take a fixed view of head and shoulders
and say this head and shoulders has to work because the head and shoulders can become
just the left shoulder of a larger head and shoulders, become part of a rectangle pattern.
And so there's a tendency of charts to morph over a period of time.

Now sooner or later, a chart will form a chart pattern which actually works and is tradeable.
I think that's one of the challenges of chartists is to have the patience to wait for charts to
get through the morphing process and then the discipline to pull the trigger, realizing that.
I recognize, I mentioned, that my win rate over time is just over 40%. That means 60% of
my trades are going to be failures. And they may be failures because the chart pattern that
I'm playing and that I'm trading morphs into something else, and it becomes a losing trade,
or it may means that it had a false start and then went.
May 17th 2017 - www.realvision.com
 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
And so we have to understand that charts are not fixed things over time. They tend to
morph. But the interesting thing is I hear people say, well, I can't trust charts because they
break out and then fail. And sophisticated chartists understand that charts that fail often
times tell a bigger story. I look at a chart pattern that fails. And that, to me, may give me
the insight that I need to place a bet on the chart. The fact that that failed may be a story
unto itself.

And then the final point that I want to make about chart pattern, and kind of this hot issue
listing that I have, which I'm going to go into some detail, and that is that I pay very little
attention to chart patterns that I place into the category of diagonal. And I look at a chart
pattern, and I define it as either a horizontal pattern or a diagonal pattern.

A diagonal pattern would be a symmetrical triangle. It would be a pattern through which

the breakout take place on a boundary line that's slanted. And so it could be a rising
wedge, falling wedge, symmetrical triangle, or a trend line. I do not believe that diagonal
chart construction is reliable for a trader. And I'm going to go a little bit more into that,
because most of the charts that I see in the social media have diagonal chart construction
drawn on them, which I believe is a trap for chartists.

Let me explain. I place all of chart patterns into one of two categories. I define a chart
pattern as a diagonal pattern or a horizontal pattern. A diagonal chart construction is one
in which obviously the boundary lines are drawn on the slanted basis on a chart. A
horizontal chart pattern is one in which at least the important boundary lines are flat or
horizontal across the chart.

As a trader, I want to trade horizontal chart patterns. The reason is that diagonal patterns,
even though they may end up being a valid pattern, are far more likely to morph. They are
far more likely to provide tricky trading situations. Let me go through some examples of
diagonal patterns so that you can see exactly what I'm talking about.

Here is a chart of the Dow Jones Transport Index. Trend line, by nature, is a diagonal
pattern. You see people who draw trend lines all the time on charts. Everybody has a trend
line on a chart. The story I like to tell people is you go through a chart book and a ruler
and a pen in a cage with an ape, and sooner or later, you're going to have a trend line
that makes some sense.

I'm not criticizing people that use trend lines. All I'm simply saying is that trend lines, for
me, change the entire trading equation, as do all of diagonal patterns. My win rate at
about 41%, 42% over time. Now somebody might say, well, you could flip a coin and be
May 17th 2017 - www.realvision.com
 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
right half the time. But that doesn't take into account the trades I go into. I may be playing
them with a very, very close and tight stop. Perhaps I'm risking $1 to make $5. And so that
changes the equation. And it can't be looked at simply as a matter of flipping a coin, in
this case.

But coming back to the Dow Jones Transportation Index. You see all sort of trend lines. If
over the course of my trading history, I would have traded only the diagonal patterns, my
guess is that my win rate would be somewhere down in the high 20s or low 30s. And
statistically, in terms of probability theory, there is just a massive difference in outcomes
between a 30% win rate and a 42% win rate. And that is why I not only focus on horizontal
patterns, but as we go through here, you see that I'm even more selective in terms of the
horizontal patterns that I'm looking for.

Here is another example of trend lines. This looks in soybean oil. And again, you can find
all kinds of cases where trend lines, even trend lines that, in this case, have multiple points,
while they sometimes change the direction of the trade, more often than not, trend lines
morph out into something else.

And so I avoid looking at trend lines. Here is an example of another diagonal pattern. And
this is a channel pattern that we could find in the Canadian dollar futures market. You can
see the well-defined channel boundaries. Again, as a diagonal pattern, they can be some
very valid ones. But as a general rule, they tend to morph. They tend to be much less reliable
and therefore much more tricky to be able to make a market forecast or statement based
on a diagonal chart pattern.

Here we have the euro Japanese yen cross. And now I'm looking again at another example
of a diagonal pattern. And this is a symmetrical triangle. And you have this symmetrical
triangle that broke out and failed, then broke out to the upside and failed, then broke out
to the downside. Eventually, it became a symmetrical triangle that actually worked. But it
had to morph.

This is a perfect example when I talked about morphology. A chart tends to morph, they
morph, they morph. Eventually they will work. But they morph, and diagonal patterns tend
to morph more often than horizontal patterns.

This is a wedge. Falling wedges and rising wedges are diagonal patterns. They can
produce successful trades. And I'm not questioning that at all. What I'm simply making the
case here is as a trader, I'm looking for higher probability situations. I've found that making

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
any sort of adamant statement about a market based on a diagonal chart construction is
really, really skating on very thin ice.

Here's an example that's currently taking place of the Dow Jones Utility Average, where
you see that dating back all the way to 2001. And this is a semi-log chart. There are times
I use semi-log chart. For most trading applications using daily charts, I do not use semi-log.
I use arithmetic charts. But this is a semi-log chart on the Dow Utilities. And you can see
that it's currently in a rising wedge pattern.

Here's another example of a current pattern which is a diagonal pattern. This is in the
French CAC, which is a futures contract traded on the major index in France. You can see
a diagonal trend line. Again, this may break out and provide a very successful long-side
trade. But as a diagonal construction, it has much more tendency to morph and provide for
a tricky trading condition.

Here again is another symmetrical triangle. This one is in the US dollar Norwegian krone
cross, where there is a symmetrical triangle that takes place. And for somebody to have
seen this downside break out in the US dollar Norway and to proclaim a bearish case
would have eventually proven to be quite wrong.

And so my observation, my experience, and in some cases, it's been experience through
the school of hard knocks, is that diagonal patterns are just destined to morph and to
frustrate traders. And hey, trading's hard enough. So why invite trouble? And that's just
generally how I view diagonal patterns, is traders just inviting difficulty in the trading
scheme of things.

I think there are probably two reasons why traders tend to like to least identify diagonal
patterns. I think one reason is that oftentimes traders, especially traders who write for an
audience, who speak to an audience that follow them, they don't want to come out and
say, I have nothing to say about markets. They need something to say about markets. And
for a chartist, that means you need to find something, you need to point to something.

Well as I've explained and will further explain, most of the time, markets defy understanding
from a classical charting point of view. And so the need to always have an opinion on a
market or be pointing out something about a market tends to lead somebody to lean on
diagonal patterns to be able to point those out.

I think the second reason, and a more dangerous reason, and sometimes very subtle, very
cunning, is that traders want to be able to justify a bias or position that they have, maybe

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
it's bullish or maybe it's bearish. And so a trader-- and they don't do it out of deception,
but they're trying to support a chart case to align itself with what their positions are in the
market. And so they're looking for diagonal patterns in that way.

I'd like to turn my attention, at this point, to those patterns which I consider to be my bread
and butter patterns. And these are patterns that are horizontal, what I define as horizontal
patterns. The first one I want to look at here, and there are three that I will focus on-- they
are the head and shoulders pattern, which is a head and shoulders bottom or head and
shoulders top-- there is the right angle triangle, which are known as either ascending
triangles, where a triangle is shaped where it comes out of the flat surface, or a descending
triangle, which is slanted down on the upside, where markets tend to fall out of the bottom
or the horizontal boundary-- and then rectangles, which is a trading range that is bounded
by two horizontal patterns.

These to me are my bread and butter. And so I first want to look at the head and shoulders
pattern. What you see here is an idealized diagram of the head and shoulders top. What
is happening during this case is there is distribution. Generally speaking, one can assume
if there is a sizable trend in a market, you have had some real deep-pocket people with
huge positions that have profited from it.

As a general rule, sometimes there are massive moves that catch everybody by surprise,
but by and large, you have very smart, deep-pocketed traders, who usually are on the right
side of major trends. Well these trends will eventually change. And what happens is you
can see through these patterns the behavior of large traders and how they are responding
to rallies and dips and so forth. In the head and shoulders, what you see is a process where
large traders are distributing their position and actually, in some cases, getting short, and
so you have a rally to the left shoulder followed by a break.

Now, large traders will attempt to manipulate markets, spread rumors. I mean in futures
markets of course, these are all completely legal things to do. And then the market rallies
makes a new high, traps the little trader, and allows the large trader to dump their final
positions. Markets break back to the neckline, rally to the right shoulder, and a reversal
takes place. This is an idealized look at this.

Now I want to show you an actual market. And you'll see the exact same pattern take
place. And in this case, it is the cross rate between the Japanese yen and the US dollar, or
the US dollar yen is what it is referred to, or dollar yen, is you'll see that the market made
a left shoulder, broke, made a head. It's a little more complicated. I mean, idealized

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
diagrams are one thing, and you'll see in these charts sometimes it's a little more
complicated than that, made the right shoulder, and then we saw a pretty substantial
downward trend.

And here is a look at a idealized diagram of a head and shoulders bottom, which of course
is just the reverse of a head and shoulders top. In this case, you have large traders who
have been trading in the market from a short side. You see the coverage on the left shoulder,
the rally to the neckline, the head, the rally to the neckline, the right shoulder followed by
a trend reversal. This is a flat boundary line, and therefore I define this as a horizontal
pattern. Again, my emphasis here is probability and reliability. And I have found that
horizontal patterns are far more reliable than diagonal patterns.

Here is a look at an actual head and shoulders bottom. This is a soybean meal, where you
can see the left shoulder, the head, the right shoulder, followed by a sizable rally. And in
this case, the head and shoulders was-- in the case of the head and the bottom, what we
define as reversal patterns. There are also cases where we see the head and shoulders
formation take place, not at tops, not at bottoms, but at midpoints along major trend. These
are called continuation head and shoulders. I don't have an idealized diagram of that. But
I'll show you an actual chart of a continuation head and shoulders pattern.

This particular chart shows a head and shoulders continuation that formed in gold from
early 2008 through the third quarter of 2009. And of course, those people who were
trading gold at the time know that when we completed this flat line top of the head and
shoulders in gold at around $1020, it led to a fairly quick trend to $1,900, a very
substantial pattern.

The second major category of horizontal pattern that is instrumental in my trading is what
they call the right angled triangle, or the ascending triangle or descending triangle-- again,
where prices break out of a well-defined pattern through a horizontal boundary line. On
this chart, it shows the idealized diagram of the two varieties of right angled triangle. On
the top, you see the descending triangle.

What takes place here is that a market rallies and meets substantial supply. That supply
brings markets back down. Each subsequent rally meets more and more aggressive selling
pressure. And so you have selling pressure that is more aggressive in being willing to sell
at a continually lower prices that meet support at a certain level. There is a point then where
that support, that flat boundary line support, gives way. And the market follows by falling
away quickly.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
Just the opposite occurs in ascending triangle, where market meets demand, meets
overhead supply, pulls back. And during the course of the formation of an ascending
triangle, buyers become more and more aggressive, whereas sellers are just kind of
scattered around at a pretty much the same level. Eventually this selling dries up, and the
buyers take over and really gain control of the market and trends go up. I will show you
an example of a descending triangle that took place and completed itself in October of
2016 in gold.

The market underwent a descending triangle that began in the summer of 2016, was finally
completed on October 4 of 2016. And this resulted in a decline in the price of gold from
around $1,300 down to a price of about $1,130. That's a substantial move that was
produced by the breakout of a descending triangle. Here, we see an ascending triangle.
This is probably going to go down in history as one of the classic textbook examples of the
ascending triangle pattern.

And this particular chart is the value, is the US dollar Chinese yuan, where the market
underwent a 20 month ascending triangle period, broke out, and you can see what has
happened to since. I think there perhaps a very strong probability that the dollar yuan will
never, at least in my lifetime, return back to the levels it was at during the construction of
this ascending triangle.

The third major category that is in my list of chart patterns I want to focus my trading on is
the rectangle. And the rectangle is a chart formation that takes place within the boundary
of two horizontal lines, one on the upper side, one on the down side. And a rectangle can
be either a reversal pattern, where prices go up, form a rectangle, trade sideways within
the boundary of two parallel lines or relative parallel lines, followed by a bear move. It
also can take place as a continuation pattern, where during the course of an up move or a
down move, a rectangle forms and then is followed by a continuation of the trend that
preceded the formation of the rectangle.

In this chart, you can see kind of an idealized diagram of the rectangle pattern, where you
see in this case, a rectangle, which is a continuation rectangle, on the top, where prices
go up, meet supply at a certain level. When prices break, they meet demand at a certain
level that continues over the course of time, followed then by the resolve and the wiping up
of all overhead supply and the continuation of the bull ten trend that's preceded it.

In the lower case, you see a rectangle, which was a reversal rectangle. Both are very valid
patterns. Again, this represent the type of patterns, the horizontal patterns, that I have found

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
far less subject to morphing with a much higher level of reliability. And sometimes that
results in much less frustration. And frustration of trading certain patterns can never be ruled
out as an important factor in the equation.

Here's an example of a rectangle that occurred in the gas market starting in 2011, April
in 2011, finally completing itself in September of 2014, where the price of gas traded
within a rectanglur boundaries, a very broad rectangular boundaries, eventually was
resolved, and that led to the great bear market in the energy markets that began in about
June of 2014 and then continued down into a bottom that finally took place in February of
2016. And this bear market, of course, was really one for the ages. In the case of gas, this
bear market originated from a rectangular pattern.

Here's another example of a rectangle. This one is a continuation rectangle that took place
in the cross rate between the US dollar and the Turkish lira, where the dollar was gaining
on the lira for a considerable period of time. The market began to form and drift sideways
within the boundaries of a rectangular pattern, finally broke out in October of 2016, and
then we saw a substantial rally in the US dollar against the Turkish lira. Now it just so
happened that that rally took place against the backdrop of an apparent overthrow in
Turkey. There was a lot of political instability in Turkey.

Now some people might have traded this market based on that instability. To me, the things
that are taking place out there in what might be called the global macro or fundamental
perspective, are incidental. I basically don't pay attention to the news. I try to keep myself
cloistered and away from the types of things that most people are on the edge of their chair
waiting for CNBC to record. And so I try to ignore the news and pay attention to the charts.

Here's another example of a continuation rectangle. This one was in the cross rate between
the British pound and the dollar. That is a cross rate that is nicknamed the cable. But you
see this sharp decline here that took place in June of 2016. That was the Brexit decline.
That was the decline that took place the day after the Brexit vote, where England withdrew
from the European Union.

Following that decline, the market drifted sideways in just a perfect, perfect rectangular
pattern, broke out in October, October 3rd. That's the kind of move I'm looking for. I'm not
looking for moves representing 50% or 60% of the value of the underlying item that you're
trading. I'm looking for moves that are in the magnitude of 5% to 20% or so of the
underlying value. And I've just found that these horizontal patterns are excellent at
identifying those types of opportunities.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
There is one final form of chart construction that I have found to be quite reliable, far less
subject to morphing and diagonal patterns. These are very brief patterns. They are what I
call typically half mast patterns. They're flags and they're pennants. And they occur during
the course of very, very strong trends.

And I think one of the values of charts is that you can look at a chart and you can see if a
market is in a sustained trend or if a market is going up and going down but going
nowhere. It's really easy to see in a chart a market that's in a very strong sustained trend.
When we get a market that's in a strong, sustained trend, it can form flags and pennants,
which, while brief, can be quite reliable and quite profitable when properly traded.

I'll show you a couple examples of this. This first one is in the Dow Jones Industrial Average,
where of course we see the Trump blast off that took place last October and the bull market
that we've had in the Japanese yen ever since. And you'll see this period that began in
about mid-December and went through early February that took place that wasn't a
rectangle, it wasn't an ascending triangle, descending triangle, or head and shoulders, but
it was just kind of a tight area of congestion that took place during the ongoing development
of a trend.

In this particular case, I define this as a pennant. Now you might look at this and say, well,
the break out was through a diagonal line. So why would I not call it a diagonal pattern?
Well in this case, the diagonal pattern was in the direction of the trend. And so the break
out was through a diagonal pattern, which supported the trend.

There's a difference between breaking out of a down trend line where the market's breaking
up through a slanted line going against it and a market that breaks out through a line that's
diagonal going in its direction. But I have found these brief pauses. In this case, I would
define this as a pennant, to be very successful as trading vehicles.

The second case that I want to show you of brief patterns within the perspective of the chart
that we're looking at is the weekly chart of the dollar yuan, where we see during the course
of a substantial move, two examples of a market that just kind of drifted. In the first case,
you can see kind of a down channel, which on the surface is a diagonal pattern. But the
fact that it took place after a straight line move makes me ready to be willing to trade it,
even though it is a diagonal pattern, because it came within a construct of a sustained,
almost dramatic move. In those cases, those are cases where we get a flag. Flags are more
dependable than a typical diagonal pattern.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
And then the second pattern we see in the dollar yuan took place starting in July, going
through October of 2016, where the market formed a pennant. It went sideways. It was a
brief pattern in terms of number of bars, resolved to the upside. And so that's kind of a
separate case. It's not purely a horizontal pattern, but for me it offers sometimes excellent
trading opportunities when we find a market that is in a sustained trend and then goes just
through a low period that forms a flag pattern or forms a pennant pattern. I have found
those patterns to be quite reliable from a trader standpoint.

Let me summarize this video that we've had on classical charting and technical trading and
just kind of summarize the key points of where we've gone. Here is what I would define as
the key points. Charts show where markets have been. And they show the path of least
resistance. And that's it. Charts cannot be used to comprehensively diagnose a market,
cannot be used to really do accurate price forecasting. They're too unreliable for that, even
horizontal patterns are.

Charts are useful to gain a perspective of where market has been, where it is right now,
and where the path of least resistance might be. Charts are not reliable to do
comprehensive market forecasting and always have an opinion on any given market at
any given time. That's not really the function of charts. That's not the purpose of charts.

Charts don't forecast prices. I think that chartists must acknowledge the fact that most chart
patterns fail. Now of course, I've talked to chartists who say they're never wrong and none
of their chart patterns ever do fail. But I'll tell you, I've made my living from charts. You'll
find no bigger proponent for the craft of charting than I am. And my experience is that most
chart patterns do fail.

Another point is that diagonal chart patterns, or diagonal chart construction, which is trend
lines, symmetrical triangles, channels, wedges, and the like, are really so unreliable that
they, in my view, they should not be used as a key component of chart-based market
speculation. That horizontal patterns have the highest degree of reliability. That they have
the tendency to morph less than diagonal patterns.

And then one final point I didn't touch on, but I think it must be pointed on, is that the
duration of a horizontal pattern I have found to be extremely important. Once horizontal
patterns get to be multiple years, and there are those cases that becomes multiple years,
they may be good for an overview of a market. But they really become useless for the
purpose of trading, because the trading really needs to be geared down into daily charts.

May 17th 2017 - www.realvision.com

 Charting Masterclasses - Episode 3: CLASSICAL CHARTING
& TECHNICAL ANALYSIS;
I have found that the most reliable are horizontal patterns that are between 10 and 26
weeks in duration. That is really the sweet spot. That's in my wheel house. Those are the
patterns that I'm looking for, that are very clear.

And just one final side note, well, what do I do with a pattern that looks like it might be but
I'm not sure it is? I ignore them. I want to see patterns that are just undeniably clear. And
so that's kind of a summary of where we've been in this chart. In the next video, I'm going
to really address myself to the role of human emotions and character traits in the whole
equation of trading.

May 17th 2017 - www.realvision.com