I asked an AI to list the best books on technical analysis. It provided a top 10 list, and when I asked for more, it added newer publications. Out of the 20 suggested books, I’ve read only one: Murphy’s “Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications”. This book, ranked number one by the AI, suggests that technical analysis largely revolves around describing stable geometric combinations, or patterns. The idea is that recognizing these patterns should lead to profitable trading.

I can’t say this approach doesn’t work, but the sheer number of patterns is overwhelming. Combine that with multiple timeframes, and you can argue that for any given movement, there’s always a timeframe where a pattern “predicted” that movement.

Each time, a different pattern appears on another timeframe, creating an almost infinite set of possibilities. While many excellent books explore this topic, success in trading doesn’t come from merely spotting or waiting for patterns. Profitability depends on price moving from point A to point B. The greater the distance, the larger your profit or loss.

Volatility as the Key

The change in distance between two points on a chart over a specific time is volatility. This is a critical element in the profit/loss equation. The other factor is volume, though I believe it’s often misrepresented or obscured by the market. Volatility, however, is measurable and accessible.

Despite its importance, volatility-based charts like point-and-figure, Renko, and Kagi bars are less popular than candlestick or bar charts. Fewer books are written about them, meaning volatility often falls outside traders’ focus.

Indicators related to volatility are limited—Bollinger Bands and ATR are among the few. I’m convinced that an insufficient understanding of volatility is a major cause of trading failures.

Patterns and Volatility: Striking a Balance

Every market movement starts with a certain pattern or group of patterns. Your task is to identify a short, practical list (no more than three) of patterns that signal the beginning of any market move. Then, determine when volatility takes precedence over patterns and vice versa.

Note that low volatility often leads to the emergence of any desired pattern, but the resulting movement is so minor that achieving a meaningful outcome is unlikely. Set a volatility threshold below which patterns become insignificant for you.

On the other hand, if a chosen pattern consistently yields profits, even when the price moves against you, the direction of movement becomes irrelevant. For instance, when trading a rebound from the upper Bollinger Band, you might secure 15 points before the price touches the band again, regardless of the overall trend.

Conclusion

Here’s what you need to do:

1. Identify three patterns that initiate any market movement.

2. Define situations where volatility outweighs patterns and when patterns take priority.

Understanding the specific financial instrument, trading conditions, commissions, spreads, and liquidity is crucial. Avoid overcomplicating signals or indicators—they should be as simple as possible. You can plan effectively by eliminating “gray zones” in your market analysis, creating a roadmap to determine where and how much to trade for optimal results.

This is why I’m skeptical about automated trading. While I can outline trading principles, the market evolves daily, producing varied outcomes. As a result, my plan for each new day differs from the last. This is the nature of market variability.

Nonetheless, you can successfully interpret and navigate the market with the right approach.

Good luck!
Best regards.