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