9/15/2017 1:54:00 PM CEST Add a Comment

Types of chart patterns detected by ATmatix

Just a few words about the way ATmatix detects the patterns and the types it supports.

A chart pattern is nothing more than a unique scheme of price tops and bottoms that appear in a certain finite period of time. Those tops and bottoms are just local maximums and minimums created by the asset price behavior.

To make things short – for instance, double bottom consists of two local minimums divided by a certain minimal number of sessions, in between which there is some local peak (additionally the rise from the lowest bottom to the peak can’t be too small). Of course, it’s not everything, because to talk about a bottom, the pattern must be preceded by a certain descending trend. The trend’s reversal is often - but not always - preceded by the creation of a bottom pattern.

A huge part is played by the parametrization of our pattern recognition algorithms. We will try to put those parameters on the ATmatix website in the future. For instance, we assumed that the rise from the first bottom to the local maximum between two valleys in a bottom pattern should be at least 5% for stocks and at least 2% for indices and futures.

Some patterns form specific shapes, such as triangles, channels, wedges, etc. Those patterns usually have two limiting trendlines. Breakout occurs when a stock price pierces one of those trendlines in a certain direction. For example, a channel pattern consists of two parallel trendlines next to each other (more or less in the same time) in the price chart and the price bounces from the bottom to the top line and back few times. Those trendlines are the breakout levels. Their slope indicates the type of the channel (horizontal, descending or ascending).

ATmatix detects trendlines in the following way: it looks for two points, being local minimums (in case of the lines limiting the pattern from the bottom) or maximums (in case of the lines limiting the pattern from the top) and a third point located between them - which doesn’t have to lie exactly on the line between those two points (there is some tolerance, without it we wouldn’t be able to find many). So, basically to set the line, you need three points. Sometimes, the technical analysts base the trendline using two points only, but there would be many of such lines found, and in our opinion minimum of three point sounds like a reasonable compromise between the large number of signals (sometimes false positives) and the risk of “overlooking” some signal due to a trendline occurrence.

Currently, ATmatix is able to detect price chart pattern types gathered below. The list is going to be gradually developed.

Bottom patterns:

  • Double bottom,
  • Head and shoulders bottom
Top patterns
  • Double top,
  • Head and shoulders top
  • Triangle, symmetrical triangle
  • Descending triangle
  • Ascending triangle
  • Descending channel
  • Ascending channel
  • Horizontal channel
  • Falling wedge
  • Rising wedge
  • Flag
  • Pennant
Broadening formations:
  • Broadening triangle (inverted triangle)
  • Descending broadening triangle (descending inverted triangle)
  • Ascending broadening triangle (ascending inverted triangle)
  • Descending broadening wedge
  • Ascending broadening wedge
Other, special types of patterns or price schemes:
  • Flat base
  • Vertical run up
  • Three rising valleys
  • Support
  • Resistance
  • Uptrend
  • Downtrend

At one point ATmatix was able to detect also a diamond pattern, but it is such a rare occurrence on Warsaw Stock Exchange that we have dropped it (the statistics wouldn’t be realiable at all).

Why does ATmatix not detect so-called candlestick patterns (hammers, shooting stars, etc.)? Firstly of all, we find them not helpful – how can you predict price movement based on one (sic!) or even a few candlesticks on the chart? Maybe it’s realiable for the weekly or longer interval charts. For us, those signals are insignificant with long-term investments – but we would emphasise it – it is just our opinion.

Secondly, many candlestick patterns’ scanners can be found accross the Internet. As we have already mentioned, the creation of ATmatix was sort of a technical and algorithmical challenge for us, slightly bigger than recognizing simple candlestick patterns.

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