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

Abstract

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.