Years ago when I was heavily involved in learning stock chart patterns for trading purposes I bought many stock pattern software programs that were supposed to automate the stock pattern recognition process.
Stock patterns have been a long time staple in the technical analyst’s toolbox and while many fundamental stock traders and academics with no real-world trading experience will try and tell you that stock chart patterns do not exist and are not a valid way of trading there is enough empirical evidence to show that trading with stock chart patterns can be a profitable endeavor if done correctly.
The main problem with any program that attempts to discern stock chart patterns is that while a trained eye can quite easily identify discrete patterns on a stock chart it is extremely difficult to program a computer to recognize them.
This is because modern computers with all of their vast computational powers cannot even come close to mimicking the human brain in “seeing” patterns on a chart. This is in direct contrast to software that identifies setups on a chart based on a mathematical analysis of technical indicators like MACD or a moving average.
These algorithms form the basis for most trading systems in use today and they are actually quite easy to program once you define the rules that make up the system.
Back to stock chart patterns…
Once you learn to identify something like a head and shoulders or double bottom pattern you can begin to see the complexity in trying to program them into a stock pattern scanner because on one chart you might have a head and shoulders pattern that develops over 50 bars of data while on another chart it develops over 80 bars.
Does a double bottom have to occur within 10 price bars or is it still valid if it is within 20? These are the questions that are subjective for the most part and thus it makes it difficult to express the answers in a chart pattern recognition program.
I have seen some software do a decent job at identifying some basic patterns but that is because they have established tight tolerances for each pattern so as to get the most accurate hits.
This of course means that other equally valid patterns will not be identified because they might have fallen one price bar outside the parameters set by the programmer. This is neither good nor bad, it just is the nature of the beast and you must keep that in mind if you try and automatically identify patterns on charts.
In closing I would say that if you find a good stock chart pattern scanner that gives you the results you want please do not use it as a mechanical trading system or you will most likely end up on the losing side of most of your trades.
Instead, use it to identify potential trades or to confirm a trade you are contemplating as for now this is the best way to use stock chart patterns in your trading business.
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