October 2022
Beginner to intermediate
288 pages
7h 2m
English
Content preview from Mastering Financial Pattern Recognition
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Chapter 4. Classic Trend-Following Patterns
Trend following, a concept so simple yet so complicated. It may be easy not to worry about timing the market and just riding it, but the reality is that doing so can be challenging due to a plethora of random variables impacting the price. A steadily rising market may get destabilized by one economic or political event but then continue to move smoothly, discombobulating the traders who got stopped out during the volatility tsunami.
This chapter covers the classic (already known and established in the world of technical analysis) trend-following candlestick patterns. These are simple and complex configurations that have been around since the dawn of technical analysis and are taught in many introductory and advanced technical analysis courses. The purpose of this chapter is to create the patterns’ objective conditions and back-test them so that you can form a basic opinion about their frequency and predictability. Some patterns may occur quite often, while others occur once in a blue moon, thus hindering the ability to properly judge them.
As previously mentioned, the way I back-test the patterns is to assume that I initiate the buy or sell position upon the next open after having validated the signal on the previous close. The time frame chosen for the back-tests in this book is hourly.
The Marubozu Pattern
The first classic trend-following pattern is the Marubozu. The word refers to baldness or close-cropped head in Japanese, and ...
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