PATTERNS
Triangular Pattern Rank
Mechanically Recognizing Triangular Formations
by Giorgos Siligardos, Ph.D.
Here's a mechanical recognition method that is suitable for most
software with a programming language and exploration features.
Patterns such as triangles, pennants, and
wedges (hereafter referred to as triangular formations, or TF) are some
of the first things to which an aspiring chart analyst is introduced when
he or she begins to study technical analysis. The chart formations in this
category are characterized by an oscillating movement of price toward an
equilibrium point. They all have two things in common: They usually take
place during strong trends and they provide good trading opportunities
with clear stops and, most of the time, clear targets. That they are commonly
posted during strong trends makes them quite useful, since the market has
reached these levels quickly and therefore leaves ample room with no significant
support/resistance after the upward or downward violation of the formation.
In Figure 1 you can see examples of triangular formations in a bullish
trend. Triangular formations are easily identified when looking at a chart,
but as most technical analysts follow large numbers of equities, it is
necessary to have a mechanical identification method and let the computer
do the dirty work. The difficult part is figuring out how to tell your
software what a triangular shape is! Computers do not understand shapes
the way humans do, so we need to translate a geometric shape into numbers
before plugging it into an algorithm.
Figure 1: Triangular formations during a strong bullish market.
The market usually produces triangular formations during strong trends.
As price has reached these levels quickly, there is ample room with no
significant support/resistance after the upward or downward violation of
the formation.
MERITS AND DRAWBACKS
To identify triangular formations, the most obvious merit of a mechanical
method is that, as mentioned, it saves time. Another benefit is that it
is quite easy to study the statistics of these formations and their implications
for a number of equities.
The drawbacks of a completely mechanical recognition method include
the method's extreme complexity and the elimination of inventiveness. In
this article I shall try to state simple, specific algorithmic rules to
define the triangular formations using the concept of linear regression
and other statistical and technical analysis tools. Then I will introduce
the simplest version of my triangular pattern rank (TPR) indicator, which
will classify the triangular formations in daily charts according to their
shape and the behavior of volume.
...Continued in the March issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the March 2004
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2004, Technical Analysis, Inc.
Return to March 2004 Contents
