How To Use Chart Patterns To Predict Trend

There are many classical well-know chart patterns that found a long time ago and now considered as "typical" ones. Also there are many other patterns that can signal a particular, bullish or bear trend, but not described yet. Known or unknown patterns that are persistent can be repeatable in the future; therefore, they can be used to predict the future price movement.

To ease the job to memorize all patterns and analyze a huge amount of charts, many chartists use different software tools - pattern recognition systems. These tools normally perform statistical classification of patterns assuming that the patterns are generated by a probabilistic system (the stock market is a semi-probabilistic system).

Technical Analyzer TA-1 (TA) by Addaptron Software has a feature to predict a future trend of stock, ETF, or index prices using pattern similarity. The prediction period can be chosen within a range 1..60 trading days; the period of historical data that used for matching recommended in 4..16 times longer than prediction period. TA searches for the best matches by scanning all historical data from the internal database.

TA ranks all possible matches on the basis of maximum correlation and minimum deviation within given historical period. TA performs pattern matching using open, high, low, and close prices and volume data. When scanning is completed, depending on degree of similarity, it ranks all possible matches within given historical period and then combine them. TA composes forecast using several best matched patterns (top ranked). Since the statistical regularities of the patterns help to create more stable picture, TA allows adding up many top-rated patterns. The composite result is built as a weighted average with weights proportionally pattern ranks.

To try free fully-functional version of TA, visit Addaptron Software download page to download and install it.

Two More Indicators Implemented in Technical Analyzer

Collected and analyzed data allow comparing different technical analysis indicators. However, according to statistical researches, the problem is that depending on time-frame, market conditions, industry specifics, type of stock or ETF, and other factors, some indicators might be best but other worst, and vice versa. In general, the question can be answered only for some average analysis. As example, according to average predictions success based on the statistics during 2010, the five of top winning indicators are: Relative Strength Index, Money Flow Index, Twiggs Money Flow, On Balance Volume, and Directional Movement System.

Technical analysts know that it is better to select the best indicators for a particular case. Evidently, it can be a time-consuming process. One of the solutions is to allow a computer program to decide which indicator should be trusted more and another less for particular market conditions and a specific shares using back-testing. Such computer program could compose the forecast with weights accordingly to predictive ability of each technical indicator. The example of such program is Technical Analyzer TA-1 (TA).

The recent researches showed that predictive abilities of some classical indicators can be improved by additional transformations. In short, if an indicator is trend-differentially coupled with price - it demonstrates better predictive abilities than a pure indicator. This idea has been used to improve the next release of TA software. The list of existing indicators in TA Technical Analysis module has been empowered by two new divergence-modified indicators - Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD). These two indicators have been transformed to a slope of line and differentially-coupled with a price line slope. Indicators and price transformation to line slopes has been performed using Least Squares Linear Regression within a sliding 10-day period (moving window).

Try free fully-functional software during 30 days; it is available on Addaptron Software download page

June 2011: SP-500 Might Not Touch 1250, At Least For Now

One of the popular ideas now is that until S&P-500 index touch 1250 number, it is too early to buy or sell. However, on the assumption that currently many market participants are looking at charts and use technical analysis to make their buy-sell decisions, the index might not move down too much, at least for now.

If almost everyone is considering that it is not good time yet to sell (or go short) and waiting for this magic number, this move might not happen. The reason is that there will be no sellers but mostly holders that are waiting. It can be a typical situation when an expectation affects the market. The index might stall for a while and then move up. Also a statistical cycle analysis method based on action-reaction idea indicate that such reverse will happen after June 15-17 and before reaching 1250 value:

Chart has been calculated using cycles predictor