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A new recognition algorithm for “head-and-shoulders” price patterns

Author

Listed:
  • Chong Terence Tai-Leung

    (Department of Economics and Lau Chor Tak Institute of Global Economics and Finance, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, Webpage: http://www.cuhk.edu.hk/eco/staff/tlchong/tlchong3.htm)

  • Poon Ka-Ho

    (Department of Economics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

Abstract

Savin et al. [Savin, G., P. Weller, and J. Zvingelis. 2007. “The Predictive Power of “Head-and-Shoulders” Price Patterns in the US Stock Market.” Journal of Financial Econometrics 5: 243–265.] and Lo et al. [Lo, A. W., H. Mamaysky, and J. Wang. 2000. “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation.” Journal of Finance 55: 1705–1765.] analysed the predictive power of head-and-shoulders (HS) patterns in the U.S. stock market. The algorithms in both studies ignored the relative position of the HS pattern in a price trend. In this paper, a filter that removes invalid HS patterns is proposed. It is found that the risk-adjusted excess returns for the HST pattern generally improve through the use of our filter.

Suggested Citation

  • Chong Terence Tai-Leung & Poon Ka-Ho, 2017. "A new recognition algorithm for “head-and-shoulders” price patterns," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(5), pages 1-18, December.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:5:p:18:n:1
    DOI: 10.1515/snde-2015-0066
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    References listed on IDEAS

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    More about this item

    Keywords

    head-and-shoulders pattern; kernel regression; technical analysis;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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