The Law of Charts
The Law of Charts
The three basic patterns making up The Law of Charts are as follows:
1-2-3s
Consolidations
Ross hooks
Some of these may be further subdivided as follows:
1-2-3s
1-2-3 highs
1-2-3 lows
Consolidations
Ledges
Congestions
Trading rangesFor years traders have looked at price chartsand wondered what they meant. Sometimes viewing a price chart issimilar to looking at the stars and trying to figure out which ones toconnect to show you the formation known as Taurus, the bull. All toooften chart formations exist only in the eye of the beholder. At whatpoint does a pennant formation become a pennant? What exactlyconstitutes a coil, and when is it a coil? Exactly how would youdefine a head and shoulders formation? When can you call amegaphone a megaphone? MORE IMPORTANTLY, what do any of theseformations tell you?
The discovery of The Law of Charts was quite accidentalsomethingon the order of Newton discovering the Law of Gravity when an applefell on his head. As with most discoveries, The Law of Charts wasdiscovered through simple observationstudying charts for many yearsuntil the formations just popped out and revealed themselves.
The details of the Law of Charts are seen in our E-book entitled,of all things, The Law of Charts. To see how this law is applied inregular trading, we are happy to share with you our weekly journal inwhich we show actual application of the law. The weekly journal, whichwe call Chart Scan, is also available at no charge.
The Meaning of the Formations
1-2-3s occur only at the end of trends and swings. They are anindication of a change in trend. They take place when the directionalmomentum of a trend is diminishing. Exactly the way to identify 1-2-3formations is detailed in our E-book. You will also find in the E-bookhow to register to receive our Chart Scan journal.
Consolidations and the ability to identify them are of utmostimportance because prices tend to move sideways far more than they tendto trend.
Ledges occur only when values are trending. They constitute a pausein the trend. The pause may be due to profit taking or, more usually,are reflective of uncertainty in the market. The E-book explains morefully how to deal with Ledges. Ledges are consolidation areasconsisting of no less than four occurrences of price value and no morethan ten occurrences of price value, having two matching highs and twomatching lows.
Congestions are sideways consolidations of price value and reflectperiods of accumulation and distribution. You might say that theyindicate a market that is essentially at fair value with no significantchanges in supply or demand. Congestion consists of from eleven totwenty occurrences of price value prior to a breakout.
Trading ranges are extended consolidations of price value. Theyconsist of sideways movement lasting twenty-one bars or more.Interestingly, statistics show that breakouts from trading ranges occurmost often on price value occurrences from twenty-one to twenty-nine.Furthermore, the narrower the trading range becomes, the more explosivetends to be the breakout, and the wider the trading range becomes, theless explosive will be any breakout from the sideways action. Tradingranges also reflect markets that are at fair value with little changein supply or demand.
Ross hooks always occur as the result of profit taking. A Ross hookis defined as the first failure of prices to continue in the directionthey were previously moving following the breakout of a 1-2-3formation, the breakout of any of the consolidation patterns mentionedabove, or the breakout of a previous Ross hook.
Each one of the basic formations is able to be defined. Thespecific definitions are available in the previously mentioned E-book,The Law of Charts.
Since the basic formations occur in a variety of ways when seen ona chart depicting actual price action, we want to help you fullyunderstand how to apply the law. There is considerably more to the Lawof Charts than can possibly be described in this overview article. Youcan obtain a clear, thorough understanding of how we trade using TheLaw of Charts through the Chart Scan, which is sent out by E-mail eachweek.
We invite you to join us in a better understanding of what you see on a price chart.
Joe Ross Trading Educators is dedicated to helping serious tradersto become better traders. Our staff and branch offices consist of realtraders trading real markets. Trading Educators is involved in daytrading and position trading in a variety of markets including futures,equities, and Forex. In addition, our offices regularly trade futuresspreads and options on futures.
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