Algorithmic Identification of Chart Patterns: A Technical Analysis Approach, Slides of Literature

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step-by-step identification procedures

which can be coded in a computer

program

Algorithmic Identification of

Chart Patterns

• Instant scan innumerous charts
• Objective statistical analyses
• Powerful research means on combinations of

chart patterns with other analysis methods

Key Benefits

Algorithmic Identification of

Chart Patterns

• Brief review of methods used in academic

literature (finance and computer science)

• Ideas I have used in my articles
• A detailed example

Outline of the Talk

Three major identification methods in academic financial literature.

• Smoothing price data
• Zigzag-ing
• Matrix template

Academic Approaches (Finance)

2 nd^ Method (“Zigzag-ing”)

• Apply a “Zigzag” swing

indicator to filter noise

(disregard changes below x% cutoff

threshold) and identify

peaks and troughs

• Define the pattern via

conditions for the peaks

and troughs

• Repeat using different

cutoff threshold x%

Trough

Trough

Peak

Peak

Peak

Academic Approaches (Finance)

3 rd^ Method (Matrix Templates)

A matrix template models the desired 0 0 0 0 0 0 0 An iconic 12x12 matrix template for H&S

 - + pattern using weights - + - 0 +2 +2 + - + - + - +2 + - +2 + 

• +2 +

• •  - + - + - +2 +2 + - +2 + - +2 + - +2 + - +2 + - +2 + - +2 +2 +2 + - +2 +2 + - +2 + - +2 +2 +2 +2 + - +2 + - + - + - + 

• •  - +1 + - + - + - + 

  • -1 -1 -1 -1 -1 -1 -1 -1 -1 -
  • -1 -1 -1 -1 -1 -1 -1 -1 -1 -
  • -1 -
  • -1 -

  • •  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -1 -1 - - -1 - 
• +2 - +2 + - + - + - + - + - +2 + - +2 + - - - 0 + - + - +1 + - +

3 rd^ Method (Matrix Templates)

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The price action is

then converted into

matrix form

Academic Approaches (Finance)

3 rd^ Method (Matrix Templates)

Sum up all weights for

the price action

x x

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The higher the sum, the

better the price action fits

the pattern model

Academic Approaches (Finance)

My Published Algorithms on Chart

Pattern Identification

Focus on:

ƒ Perception of Technical Analysts in mind

ƒ Elimination of Variation and Scale obstacles

ƒ Implementation in almost any technical analysis

software (Simplicity)

ƒ Execution Speed

To accomplish the above:

I created different algorithms per case (pattern)

Simple ideas I have Used (I)

• Chart patterns usually consist of

branches

• These branches have some dimensional

restrictions with respect to one another

• If we identify even just one of these

branches, then we can usually identify the

whole pattern

Simple ideas I have Used (II)

When a branch of a chart pattern is more or less curved, you can usually identify its important points

(no matter the scale)

Move backwards in time until

you find a price (Q) which is

lower than the last one (P)

Q

P

Check all prices

between P and Q.

Example:

Identifying the top of the head in H&S

The highest of them is the top of the head

What is a Cup pattern?

Rounding Bottom

after a downtrend

Rounding "Bottom"

after an uptrend

All these different types of rounding

"bottoms" are called cups and they

are generally considered bullish

patterns

Rounding "Bottom"

after a sideways market

Identifying the Cup

A

High of the last Bar

Move backwards in time until

you find a bar having a higher

high than A.

Consider the bars

below the red line

Let C be the lowest low of all red bars

C