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By Emmanuel Nyemera
In his methodology to test the forecasting value of the patterns, Mr. Levy evaluated only
completed patterns which were successfully followed by a chart breakout (i.e. a price
movement which penetrated the fourth reversal point of the pattern) prior to the next
reversal point. He then measured the performance in the 1, 4, 13 and 26 weeks from the
time of the chart breakout and found no significant forecasting value.
In 1982 Arthur Merrill picked up Levy's idea. Using data of the Dow Jones Industrials and a
constant filter of 5% to identify the five-point patterns, he evaluated the average extent of
the swing just following the completion of the various five-point patterns. He found
considerable forecasting power.
Mr. Merrill structured Mr. Levy's 32 five-point patterns into 16 patterns in the shape of an
"M" which startwith a upswing and 16 patterns in the shape of a "W" which start with a
downswing. He then ordered them on a scale, from the strongest to the weakest, and gave
their relative occurrences and extent of the swing following the completion of each fivepoint pattern.
16 M Patterns
16 W Patterns
All of the traditional technical patterns such as head-and-shoulders, triangles, uptrends and
downtrends can categorized as Ms and Ws as well. For example an M13 is a triangle or
wedge and a W16 is a classic up trend.The categorization into classical chart patterns
follows:
Head and Shoulders: W6, W7, W9, W11, W13 and W15
The main challenge for a trader is how to pinpoint the end of the fifth point ending the
completion of the particular five-point in order to enter a trade at the beginning of a
potential profitable new swing. For that matter, traders use price and time projections
methods. The study of the geometry in the five-point patterns is the only method available
for that.
References
Robert A. Levy, The Predictive Significance of Five-Point Chart Patterns, Journal of Business, Volume 44,
Issue 3 (Jul., 1971), 316-323
Arthur Merrill, Filtered Waves: Basic Theory, The Analysis Press, Chappaqua, New York, June 1977,
183 pages.
Arthur Merrill, Behavior of prices on Wall Street, Second edition, The Analysis Press, Chappaqua, New
York, 1984.
Arthur Merrill, M and W Patterns, Market Technicians Association (MTA) Journal, Issue 7, February
1980, pp. 43-54.
Arthur Merrill, M and W waves- more data, Market Technicians Association (MTA) Journal, November
1984, pp. 23-29.