Forex Pattern Recognition
What is Chart Pattern Recognition?
Chart Pattern Recognition refers to computer algorithms designed to recognize regularities in the price data series of a financial instrument, price regularities identified as chart patterns. Chart pattern recognition is a machine learning process. This means developers train and customize their system based on historical price data (supervised process) in order to use it for forecasting future price behavior (unsupervised process).
Introduction to Chart Pattern Recognition
Chart pattern recognition systems belong to technical analysis software. Their aim is to analyze and to identify recognizable patterns that may occur in the price chart of a Forex pair, an index, a commodity, etc. There are hundreds of different recognizable patterns. The recognition process involves several technical analysis theories such as Elliott Waves, Fibonacci Ratios, Harmonic Patterns, etc. These patterns are more reliable when identified on long timeframes, such as the 1-Hour, 4-Hours, and 1-Day.
Chart pattern recognition software includes:
■ Indicators that plug-in into a trading platform (MT4, MT5, etc.) and operate fully autonomous, without any human intervention
■ Computer algorithms that run on a web-server and distribute their findings (identified chart patterns) to a list of subscribers
The 5-Step Process for Identifying Chart Patterns
Chart pattern recognition systems incorporate advanced algorithms designed not only to identify general chart patterns, but also to filter them, and then to calculate its trigger and target levels.
This is a 5-step process, generally used by pattern recognition systems:
(i) Analyzing simultaneously different financial instruments on all available timeframes
(ii) Identifying general potential patterns (based on Elliott Waves, Harmonic Ratios, etc)
(iii) Filtering the results to exclude false or weak patterns
(iv) Calculating trigger levels (enter) & target levels (pattern completion / exit)
(v) Drawing the full deployment of the pattern in the corresponding chart/timeframe
..Start all over again {(i)}
Chart Pattern Recognition Systems
These are some popular pattern recognition systems. Most systems are commercial and web-based, but there are also two free indicators for MT4.
1. Forex Trendy
■ Type: Trend Detector / Recognizing Triangles, Flags, and Wedges
■ Assets / Timeframes: 34 Forex pairs / 9 timeframes
■ Platforms: Web-Based System (delivers signals via SMS, Audible Alert, On-Screen, and eMail)
■ Price: $37 every four months
Forex Trendy scans simultaneously 34 Forex pairs in 9 basic time frames (from one minute to one month). The software recognizes trend patterns and generates trading signals. Forex Trendy is focusing exclusively on price action without the use of any indicator. It comes with a book (.PDF) explaining methods and software specifications.
- No installs (web-based software, servers in Florida, US)
- Live charts of the best trending pairs among 34 Forex pairs and 9 timeframes
- Extra (free) indicator for recognizing Triangles, Flags, and Wedges on 34 Forex pairs and all time frames
- Focusing on real price action by aiming to identify the master trend and to generate trading signals
- Adapts any market conditions (flat and trending markets)
- Recognizing Break-Out Patterns
- Audible alerts, SMS alerts, email alerts, on-screen alerts
2. Autochartist Software
■ Type: Web-Based Pattern Recognition
■ Assets / Timeframes: All Financial Assets / All Timeframes
■ Platforms: Web-Based, MetaTrader-4 Plug-in
■ Price: Commercial Software / Price Depends on the Forex Broker
Autochartist is a very popular pattern recognition software that supports the automatic identification of basic chart patterns and formations.
Features:
- Chart patterns and Fibonacci patterns
- Includes ABCD patterns, Butterfly and Gartley formations
- Analyze any financial asset in any timeframe
- Autochartist can integrate with MT4 (via plug-in)
- Trading alerts (visual and audio alerts)
- Customizable searches
- Autochartist PowerStats (information about the moves of Forex Pairs)
Forex Brokers offering the AutoChartist software:
► AXI offers the Autochartist Software for Free
3. StrategyQuant Trend Recognition (for Pros)
■ Type: Advanced-Trend Recognition / Trade Strategy Builder
■ Assets / Timeframes: All Financial Instruments / M15 to D1
■ Platforms: MetaTrader-4 or NinjaTrader
■ Price: A wide variety of packages, plus a free trial
The platform offers strategy building using a combination of tools including prices, indicators, price patterns, oscillators, order types, and time values (like time of day, a day of the week, etc.). All these parameters are called ‘Building Blocks’ and then combined using logical operators to create entry/exit rules.
StrategyQuant includes also a great number of ready-to-use strategies for any financial market and for any timeframe. The finalized trading strategies can be exported as a MetaTrader-4 or a NinjaTrader Expert Advisor with complete source code.
Features:
(1) Build an unlimited number of trading strategies for trading any asset in any timeframe
(2) Find already-made strategies and customize them
(3) Optimize a great number of trade strategies and identify the best parameters for performance maximization
(4) Find and use tens of different indicators, StrategyQuant supports also Range/Renko bars
(5) Using all the possible combinations of indicators and orders, StrategyQuant can literally create trillions of different trading strategies
(6) Export your finalized strategies as a MetaTrader Expert Advisor or Ninja Trader strategy with full source code
4. Two Free Indicators/Plugins for MT4
■ Type: Plugins for MT4
■ Assets / Timeframes: Forex Assets / All timeframes
■ Platforms: MetaTrader-4
■ Price: Free
These are two free Chart Recognition Indicators for MT4:
(1) Flag and Pennant Indicator for MetaTrader 4
This MT4 indicator identifies Flag and Pennant patterns. The trend detection uses linear regression, while the “breather” detection uses a channel.
► https://www.mql5.com/en/code/13704
(2) Pattern Recognition v1.0 for MT4
The indicator identifies the following patterns: Bullish Engulfing pattern, Three Outside-up pattern, Bullish Harami pattern, Three Inside-up pattern, Piercing Line pattern, Three White Soldiers pattern, and Morning Doji Star.
► https://www.mql5.com/en/code/9024
Conclusions and Guidelines Regarding Chart Pattern Recognition
Learning to recognize and to use efficiently chart patterns can increase significantly your probabilities of entering profitable trades (up to 75%). Beginners should better use a friendly recognition system such as ForexTrendy. More advanced traders can test their skills using a more sophisticated system such as Autochartist software.
In any case, these are some key guidelines:
(i) Prepare with caution some set-ups in order to enter the right trades at the right time (timing is everything)
(ii) Don’t enter the trade before the pattern formation is properly confirmed
(iii) Trust pattern recognition in timeframes M30 and above (longer timeframes are more reliable)
(iv) Confirm that there are no controversial patterns in different timeframes of the same instrument
(v) Even if you can achieve a 75% winning ratio via a pattern recognition system, never underestimate the remaining 25%. This 25% can easily blow up your account
(vi) It is highly recommended to implement tight money management, especially if you are not familiar with trading such patterns
(vii) Combine the findings of pattern recognition software with the readings of a reliable indicator (for example the MACD, and/or the MACD Divergences)
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