Hi guys, hi from Andrea Unger.
Patterns in trading.
Who follows my material knows that I seldom use indicators in my trading systems and who follows me more in-depth, also knows that I base most of my buildings in trading systems on patterns, chart patterns but the way I use them is not the conventional way.
The “Unger way” to use Patterns in Trading
I mean, I use patterns, but I start from a basic model without patterns, and on this basic model, which would be a trend following model, a counter-trend model or even a bias model, on this model I then insert filters from a library proprietary a library of patterns, to understand how the market reacts to different situations.
My patterns try to identify the situation in the market and, based on the response of the system on my patterns’ application, I try to understand the dynamics of the market and then I use patterns to filter the trades from the basic model.
This is the Unger way use patterns, but when we talk about patterns, immediately what comes into our mind, is the classical patterns from technical analysis or from price action and these patterns are the setup, the base, the start of a trade.
If there is the pattern then I take the trade if the pattern is broken from a breakout or something, that’s this work.
The evidence is in numbers and what I do is that I test different situations.
A sample test of pattern in trading
I remember, you might know I am a member of SIAT, the Italian Society of Technical Analysis, part of IFTA, I was a standard member, now I am an honorary member, I had been part previously in the scientific committee of SIAT and having been asked to, I wrote an article about engulfing bullish, this well-known technique, candlestick technical analysis pattern.
I run a number of tests with software simply to define that there was no way, in my opinion, to make this pattern work.
So my response was that this pattern doesn’t work as it is supposed to do from literature.
It was a disaster, people got angry saying: “You cannot say this… the pattern needs to be contextualized, it needs to be understood in what situation it has to work and so on and bla bla bla bla bla”.
I tried to place the pattern in specific situation with some filters, trend filters and a number of situation, but in the end I did not find a unique way to say: “Yes this pattern works if…” no I’m not able to make this pattern work and this pattern is reported as one of the most successful and strong in the candlestick theory, but my tests did not show any evidence of the strength of this pattern.
What I said is: “I believe that people from the society of technical analysis who became mad at me saying that I had to understand the pattern, were people working with candlestick patterns, making a living of candlestick patterns” so finding Andrea Unger writing “This pattern doesn’t work” was outrageous, but what I answered is that probably, these people with their putting the pattern in the right place, contextualizing the pattern and so on, in the end, did use their feeling, their particular feeling of the market.
So it’s something that is not algorithmic, but it’s something very human and they were able to find a way to make that pattern work, because they had that something that gave them the right answer or the right reading of the pattern, but the standard student reading a book or going through a course about candlesticks, probably had not the same feeling and normally started his way to ruin because that pattern, that specific one as many others, simply didn’t work the way it was supposed to do.
I’m not here to say: “Patterns of technical analysis don’t work only algo trading the way I do is the way to go”, no don’t claim this, it’s the truth but… (just kidding) but I test things.
My project about Patterns in Trading
So I started a path of tests a long time ago and now I try to put everything together and I will do that in this magazine about automated trading from myself I mean (and this is me) and in different chapters I will go through a number of well-known patterns with classical entries, exits and different ways to use the patterns to see what works in front of evidence of numbers, because the right way to go is to test things.
If the test is positive you can use it, if the test is negative you have to understand why it is negative, maybe there is a reason, maybe once you found the reason you’ll find a way to make it work, or if it simply doesn’t work and there is no reason to have it working, you abandon it.
I did that and I can anticipate that one of the patterns that surprisingly showed the cleanest results with classical pattern/entry at breakout of the pattern/stop-loss at the opposite part of the pattern/ take profit 3 times the stop, so a very very basic situation, is the outside bar.
The outside bar is a bar that normally, in my Andrea Unger trading style, normally blocks you from trend following entries, because such a large range bar, because an outside bar is obviously a large range bar, being larger than the previous bar, normally inhibits the trend because you have had “decision” and now you have a period of “choppy” markets and therefore you don’t enter for a breakout for a trend.
In this case, looking for a trend for this pattern was a surprise for me to see that there is a situation where this pattern produces profits.
So I mean, it’s interesting and I’m very happy, I run this test because I found interesting results that I can use in my trading, that you can use in your trading if you read this articles and if you follow what we do.
I put this here, there will be many chapters because there are many patterns, the classical patterns, the outside, the inside, the engulfing, the pin bars and hammer, hanging man, whatever.
I mean, all these very well-known technical analysis patterns, I’ll try to put them together into systems to see if and how they work.
That’s it guys, if you have experience with patterns please comment here below, it will be interesting to share and I will keep you updated and posted about new outcomes in this research.
In the meantime ciao from Andrea Unger, see you next time ciao.