Could you please explain why does price of a stock sometines form patterns like wedge, triangle (especially when it happens over a long period of time e.g. over a few years)? I mean that three or more price highs hit the same straight line. (And price lows hit another straight line thereby forming wedge pattern or triangle pattern).

I suppose it's simple when lines are horizontal - the upper line is caused by a large sell-order(s) and the lower line is caused buy a large buy-order(s).

But wedge and triangle are formed buy non-horizontal lines. What is the reason for this kind of S&R lines?


It's a great question and it is utterly, completely mysterious.

Nobody has a clue.

It would be like asking any sociological question .. why is Starbucks popular, why do Westerners use sitdown toilets .. who knows?

You could write any number of guesses at the "reason" but it's just guessing.

An important observation:

  • all the things you're mentioning were worked out, noticed, by "Honma, 'God of the markets'" who invented what we now call charting or so-called technical analysis.

He lived in the 1700s and was the first "chartist" or "chart trader" (focussing on what we call "candlesticks" in particular).

(There has been nothing new in charting since then. He noticed all of the four or five patterns that are charting and "technical analysis" - and that's all there is.)

The interesting thing is that Honma back in the day himself pointed out we have not a clue about the "reasons" for these patterns - just that they do exist and (in his opinion) you can, in a word, make money from them.

Once again,

• You are asking for the "reasons" they exist. It is an utter mystery, completely unknown and likely unknowable. (You can trivially find a million pages of writing by idiots guessing at the "reasons".)

• They are completely experiential: they "happen to exist" and (if you "believe" in technical analysis) you "use them" accepting point 1 just above.

• This was all entirely worked out by Honma. (And, he made the observation that the "reasons are unknowable/meaningless".) Nothing has been added since then.

If (for some reason) you want my particular sheer vague guess at the reasons for these triangle things that some have made piles of money from, my guess is: they are basically geometrical expresses (graphs if you will) of the two human emotions: fear-desperation-panic and elation-idiocy-confusion. So, fear sort of compresses then explodes .. etc. My "theory" is no more thought out or detailed than that, because, see point 1 above - it's completely unknowable, like any sociological, human-mass-movement question.

Regarding as you say how things keep "hitting a slope" (not just a more understandable level line): to me it's just an expression of those two emotions. First the less gutsy (ie: less stupid, less risky) people get shaken out by relatively bigger moves; more and more gutsy/stupid/risky people hang on with "smaller and smaller tolerances". When it busts one way or the other everyone who was wrong gets shaken out instantly and you get the explosion one way or the other. But - that's just a vague look at things, and may be utterly incorrect.

Note too that feedback loops are a huge thing in human behavior. It could be that "angled lines" exist more and more because . . . people just see them, and if you don't stick to them you will lose - because others see them. But again, that's just a trendy thing you hear, could be hopelessly incorrect.

If you are interested in Honma (sometimes "Honna" etc) and his badass rice trading, can trivially google books etc., eg: amazon.com/dp/B00J24NXJK

Also, the main modern-times source of pretty much all technical trading is the Nison book, which basically represents Honma for today: amazon.com/dp/B00CS74GBM

  • Thank you! Are you sure wedges and triangles have been around for that long? I was inclined to attribute them to modern markets (information technologies, robotic trading). – Daniel Aug 8 '20 at 14:03
  • @Daniel - for sure! They were well understood since at least say the 1800s? Certainly long before computers. – Fattie Aug 8 '20 at 15:56

What are the chances that you could look up into the sky at night and see a cluster of stars that forms a pattern? Perhaps the Big Dipper? Or a W shaped group such as Cassiopeia?

Similarly, if you look at a set of data points such as the price bars of stocks, they form random patterns. Trust me, the trading desk at Goldman Sachs isn't saying, "Let's form a descending triangle with today's trading in Netflix."

And if you stare at a Jackson Pollock painting long enough, you might see the face of your mother-in-law in it.

  • Have you seen a real triangle or wedge pattern? The price walks up and down but bounces away (tens, hundreds of times) from two straight lines. You really think that it is just a random walking of price? – Daniel Aug 8 '20 at 8:59
  • @Daniel , my guess is the answerer would be very familiar with everything about charts and trading. It's a fact that (A) some traders / mathematicians / thinkers on the matter simply believe such patterns do not actually exist, they think "you and I" so to speak are just seeing things and it's random. Many sensible, academic, serious people are in camp "A". Then there is camp (B) who clearly see and agree that compression triangles eivdently exist, but they believe there is no value whatsoever in trading them, they have zero predictive power. Then, camp (C) "see" them and trade on them... – Fattie Aug 9 '20 at 13:27
  • Further, within camps B and C, you may have the (excellent) question, why do such patterns exist? (Exactly as you have asked.) In answer to that question you can either (I) believe (like me) that in our current understanding of human behavior / chaos theory whatever / mathematics / psychology we very simply do not have a clue, and any guesses at it are puerile and fatuous, or, (II) any number of acdademics have (fatuous, puerile) theories on the "why". Note though that for thinkers in Camp (A) the why question is irrelevant. – Fattie Aug 9 '20 at 13:30
  • Thus, BobB for example is I believe in Camp A. I am in Camp C-I. The spirit of your question is in Camp C-II. It's easy to find traders in Camp B. Camps A+B think Camp C are idiots for trading triangles. Camps B+C think Camp A are bizarre because they don't see the triangles. Camp CI and CII mutually think the other side are scientifically naive bucolics. And since vast, just epic, just unimaginably large, sums of money are at stake, opinions run high!! :) – Fattie Aug 9 '20 at 13:47
  • @Fattie - Patterns clearly exist. Some people can look at a water stain on the wall and see the Madonnna :-). On a more serious note, whether you believe that patterns are random or that they are the manifestation of trader behavior doesn't really matter. What does matter is what are you going to do with them? If you're a serious trader (size not dedication), are you going to wager big bucks on a geometric pattern? Why not Fibonacci numbers. Or for that matter, prime numbers? Can you set up a successful trading system based on those patterns? I think not. There are far better ways to trade. – Bob Baerker Aug 9 '20 at 13:59

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