Mastering Financial Pattern Recognition

Chapter 10. Candlestick-Based Trend-Following Strategies

Pattern recognition is only one part of the equation. When you a find a pattern, you are most likely to use it within a wider trading framework, as trading systems relying purely on candlestick patterns are unlikely to yield consistent and stable positive returns.

This chapter discusses some examples of strategies you can use to filter the patterns using specific technical rules when dealing with trend following. Each market has its own characteristics and must have optimized strategy parameters, which is why I recommend you focus on understanding the main ideas and concepts rather than take away the exact parameters of the strategies presented in this chapter.

Ideally, the strategies should help you understand how to combine the different candlestick patterns (classic and modern) with some technical indicators. I also discuss the indicators in this chapter so that you understand their mechanisms and their weaknesses.

Note

Filtering refers to the concept of choosing the signals that have a better probability of providing a positive return.

Combining the Double Trouble Pattern with the RSI

As a reminder, the Double Trouble pattern is a modern trend-following candlestick configuration that incorporates volatility in its characteristics (calculated using the ATR indicator). The RSI is an indicator that, as discussed previously in the book, reinterprets the market’s momentum into values between 0 and 100 to better understand ...