You don’t have to spend countless hours any more looking at stock charts in order to identify profitable patterns.
After years of research I have developed systems to detect some popular chart formations mechanically.
When it comes to trading, however, nothing is certain. Identifying a specific chart pattern, doesn’t guarantee any profits because there is a high probability that the stock will fail to perform as expected.
A friend of mine purchased a metastock patttern recognition system plug-in and before using it to trade with real money he had the foresight to test it. To his dismay the test results were disastrous: The profit factor was <1.0 and profitable trades <50%.
Unlike similar systems which only identify specific chart pattern, my systems use also a number of money flow indicators and conditions to filter out stocks with a high probability of failing to complete the pattern successfully.
Identifying a pattern and entering a trade, however, is only the first step. Knowing when to exit is equally important. To calculate the profit target for some of these formations, traders have relied on the traditional measuring formula introduced for the first time in Edwards & Magee’s Technical Analysis of Stock Trends, in 1948 which states that the breakout will duplicate the formation height.
My research has revealed, however, that this rather simple method tends to overestimate breakouts from flags and conversely underestimate rectangle breakouts. This is probably because the flag pole height is, by nature, more than double the rectangle height.
I have therefore derived new, more realistic, measuring formulas, more appropriate for current market conditions, based on my original research, for trading these formations efficiently. You can find more information about chart formations and profit targets in my articles in Technical Analysis of STOCKS & COMMODITIES.
My work on chart patterns, includes systems and explorations (scans) in order to detect the following popular formations. You can find the system performance during the last 10 years (until September 2018) at the bottom of the page. You can purchase these systems for the Amibroker and Metastock platform by clicking on the appropriate tabs at the left.