Mastering Financial Pattern Recognition: Finding and Back-Testing Candlestick Patterns with Python

Preface....6

Why This Book?....6

Target Audience....7

Conventions Used in This Book....8

Using Code Examples....9

O’Reilly Online Learning....10

How to Contact Us....10

Acknowledgments....11

1. Importing and Processing Financial Data in Python....12

Installing the Environment....12

Creating the Importing Algorithm....16

Putting It All Together....23

Summary....25

2. Algorithmic Mindset and Functions....27

Coding the Primal Functions....28

The Function to Add Columns to an Array....28

The Function to Delete Columns from an Array....30

The Function to Add Rows to an Array....32

The Function to Remove Rows from an Array....32

The Function to Round Numbers....34

Coding Signals....36

Creating the Signal Charts....42

Coding Performance Evaluation Functions....50

The Hit Ratio....51

The Rate of Return....51

The Profit Factor....53

The Risk-Reward Ratio....53

The Number of Trades....56

Creating a Performance Evaluation Function....56

A Hypothetical Example: Appraising Performance....60

3. Introducing Technical Analysis....63

Charting Analysis....66

Indicator Analysis....78

Moving Averages....78

The Relative Strength Index....81

Pattern Recognition....85

Common Pitfalls of Technical Analysis....88

Wanting to Get Rich Quickly....88

Forcing the Patterns....88

Hindsight Bias, the Dream Smasher....89

Assuming That Past Events Have the Same Future Outcome....89

Making Things More Complicated Than They Need to Be....90

Technical Analysis Best Practices....90

Harness the Power of Different Time Frames....90

Use More Than One Strategy or Indicator....91

Choose the Right Type of Strategy for Current Market Conditions....91

Don’t Underestimate Default Parameters....92

4. Classic Trend-Following Patterns....93

The Marubozu Pattern....93

The Three Candles Pattern....101

The Tasuki Pattern....108

The Three Methods Pattern....116

The Hikkake Pattern....120

5. Modern Trend-Following Patterns....125

The Quintuplets Pattern....125

The Double Trouble Pattern....133

The Bottle Pattern....144

The Slingshot Pattern....149

The H Pattern....155

6. Classic Contrarian Patterns....161

The Doji Pattern....161

The Dragonfly Doji....163

The Gravestone Doji....164

The Flat Doji....164

The Double Doji....165

The Tri Star Doji....165

The Harami Pattern....170

The On Neck Pattern....179

The Tweezers Pattern....185

The Stick Sandwich Pattern....190

The Hammer Pattern....195

The Star Pattern....199

The Piercing Pattern....203

The Engulfing Pattern....209

The Abandoned Baby Pattern....213

The Spinning Top Pattern....217

The Inside Up/Down Pattern....221

The Tower Pattern....226

7. Modern Contrarian Patterns....231

The Doppelgänger Pattern....231

The Blockade Pattern....237

The Euphoria Pattern....241

The Barrier Pattern....247

The Mirror Pattern....252

The Shrinking Pattern....257

8. Advanced Candlestick-Charting Systems....261

Heikin-Ashi System....261

Detecting the Doji Pattern....263

Detecting the Tasuki Pattern....265

Detecting the Euphoria Pattern....268

Detecting the Double Trouble Pattern....269

K’s Candlesticks System....271

Detecting the Doji Pattern....272

Detecting the Tasuki Pattern....274

Detecting the Euphoria Pattern....275

Detecting the Double Trouble Pattern....276

9. Candlestick Patterns Exit Techniques....278

The Symmetrical Exit Technique....279

The Fixed Holding Period Exit Technique....282

The Variable Holding Period Exit Technique....283

The Hybrid Exit Technique....284

Pattern Invalidation....285

10. Candlestick-Based Trend-Following Strategies....288

Combining the Double Trouble Pattern with the RSI....288

Combining the Three Candles Pattern with Moving Averages....291

Combining the Bottle Pattern with the Stochastic Oscillator....295

Combining the Marubozu Pattern with K’s Volatility Bands....300

Combining the H Pattern with the Trend Intensity Index....308

11. Candlestick-Based Contrarian Strategies....313

Combining the Doji Pattern with the RSI....313

Combining the Engulfing Pattern with Bollinger Bands....316

Combining the Piercing Pattern with the Stochastic Oscillator....319

Combining the Euphoria Pattern with K’s Envelopes....321

Combining the Barrier Pattern with the RSI-ATR....325

12. Risk Management and Trading Psychology....330

Basics of Risk Management....330

Stops and Targets....330

Trailing Stops....331

Position Sizing....331

Economic Calendar....334

Behavioral Finance: The Power of Biases....335

Cognitive Biases....336

Emotional Biases....339

Trading Framework....340

Index....343

About the Author....378

Candlesticks have become a key component of platforms and charting programs for financial trading. With these charts, traders can learn underlying patterns for interpreting price action history and forecasts. This A-Z guide shows portfolio managers, quants, strategists, and analysts how to use Python to recognize, scan, trade, and back-test the profitability of candlestick patterns.

Financial author, trading consultant, and institutional market strategist Sofien Kaabar shows you how to create a candlestick scanner and indicator so you can compare the profitability of these patterns. With this hands-on book, you'll also explore a new type of charting system similar to candlesticks, as well as new patterns that have never been presented before.

With this book, you will:

• Create and understand the conditions required for classic and modern candlestick patterns
• Learn the market psychology behind them
• Use a framework to learn how back-testing trading strategies are conducted
• Explore different charting systems and understand their limitations
• Import OHLC historical FX data in Python in different time frames
• Use algorithms to scan for and reproduce patterns
• Learn a pattern's potential by evaluating its profitability and predictability