Mastering Financial Pattern Recognition

Chapter 2. Algorithmic Mindset and Functions

An algorithm is a set of rules that a computer applies given the realization of certain conditions. You generally use an algorithm to solve a specific problem or to simply follow a repetitive sequence of tasks. You can also use algorithms to find patterns by scanning for the conditions that you set.

The main purpose of this book is to show you how to scan, find, and evaluate candlestick patterns and strategies. The main benefits of using an algorithm as opposed to manually performing the tasks are as follows:

Speed

Algorithms can run at extreme speed compared to humans. While a simple algorithm can scan hundreds of thousands of data pieces in a few seconds, a human may spend weeks and months doing the same task.

Discipline

Algorithms follow a distinct set of rules and do not have feelings or emotions that make them ignore the rules occasionally. In addition, algorithms do not fall into the trap of subjective interpretation. This is important for the evaluation process as you need objective and clear measures to judge your trading system.

Percentage of error

Algorithms are generally error-free when there are no bugs in the code. Humans can make a lot of mistakes due to inattention and fatigue.

Note

A trading system is composed of multiple algorithms such as trading and risk management algorithms. A robust trading system relies on clear and stable rules-based algorithms to give reliable measures.

This chapter is divided into four ...