The leading spread bet and CFD provider IG Markets has launched some chart recognition software, and it begs the question – is this going to bring more people into charting?
Charting is controversial. Essentially it is a belief that the near future can be predicted by the near past. More specifically it is a claim that what’s going to happen in the near future has very little relationship to the fundamental underlying performance or the way in which that wider market works – so the gold price is the same as retail shares is the same as US Dollars.
The idea is that there are certain patterns of behaviour in the share price and the investing community will react very similarly depending on the recent information about the share price. This can be shown in certain patterns that commonly occur on a share price’s chart. One of the most famous of these is a “head and shoulders” where you have a peak in the share price preceded and followed by smaller peaks. If you see this pattern of three peaks then you should sell, or go short. So they say.
However strange this sounds – and it has been compared more than once to astrology – some investors swear by it.
The idea of chart recognition going into computers is not new. After all these are simply graphical examples of mathematical patterns, although as you would expect there is considerable disagreement over what constitutes the graphical patterns.
Charting software may now make it easier to spot the patterns. While this may be an issue with timing, however this could also make a lot of these movements into self-fulfilling prophecies. For example, if a couple of thousand investors see the warning light flash red on their computer, they may dump the shares no matter what. So whatever you think of charting (as you may be able to tell I’m quite sceptical) it may be worth following just because a lot of other people are doing the same thing.