Summary

The website content discusses the application of advanced pattern recognition, specifically the 8–3 pattern, in creating a trading strategy on TradingView, with a focus on using the Relative Strength Index (RSI) to generate buy and sell signals.

Abstract

The article delves into the concept of pattern recognition in financial trading, emphasizing the use of a patterns-based strategy known as the 8–3 pattern. This strategy is applied to the RSI indicator to identify potential trading opportunities. The 8–3 pattern is defined by a series of eight consecutive closes where each close is either lower or higher than the close three periods prior, depending on whether it's a buy or sell pattern. The strategy is further refined by requiring the RSI to be below 30 for a long signal and above 70 for a short signal. The author provides the Pine Script code for implementing this strategy on TradingView and illustrates its application with signal charts on EURUSD and DXY. Additionally, the author promotes the importance of objective technical analysis, encouraging traders to back-test strategies, optimize them, and include transaction costs and risk management in their tests. The article also references the author's book on trend-following strategies in Python and recommends Lumiwealth for learning algorithmic trading.

Opinions

The author advocates for the use of objective technical analysis techniques and strategies that are transparent and can be back-tested.
There is a recommendation to adopt a critical mindset, free of emotions, when evaluating trading techniques or strategies.
The importance of including transaction costs and slippage in back-testing is highlighted to ensure a more realistic assessment of a strategy's profitability.
The author emphasizes the necessity of risk management and position sizing in trading strategy tests.
Contin

Advanced Pattern Recognition for Trading

Creating a Pattern Recognition Trading Strategy in TradingView

Pattern recognition is always an exciting field when it comes to financial research and trading. This article discusses a patterns-based strategy applied on a famous technical indicator.

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The 8 — 3 Pattern

Pattern can come in all shapes in forms, from price patterns to volume patterns and even timing patterns. The 8–3 is a simple pattern that relies on successive conditions on different variables to be realized. The following are the conditions for the 8–3 pattern:

A buy pattern occurs after eight successive close prices where each close price is lower than the close price three periods ago.
A sell pattern occurs after eight successive close prices where each close price is higher than the close price three periods ago.

The strategy takes the 8–3 a bit further and applies the conditions on the RSI with an extra step.

Creating and Coding the Strategy

The strategy has the following rules:

For a long signal, the RSI must shape a 8–3 pattern with the last value below 30.
For a short signal, the RSI must shape a 8–3 pattern with the last value above 70.

The following Figure shows the signal chart on EURUSD:

The code of the startegy on TradingView is as follows:

study("8-3 RSI Pattern", overlay = true)

transp   = input(0)
Numbers  = input(true)
SR       = input(true)
Barcolor = input(true)

TD = rsi(close, 14) > rsi(close, 14)[3] ?nz(TD[1])+1:0
TS = rsi(close, 14) < rsi(close, 14)[3] ?nz(TS[1])+1:0

TDUp = TD - valuewhen(TD < TD[1], TD , 1 )
TDDn = TS - valuewhen(TS < TS[1], TS , 1 )

plotshape(TDDn==8 and rsi(close, 14) < 30?true:na, style = shape.triangleup,   color = green, location =  location.belowbar, size = size.small)
plotshape(TDUp==8 and rsi(close, 14) > 70?true:na, style = shape.triangledown, color = red,   location =  location.abovebar, size = size.small)

The following Figure shows the signal chart on DXY:

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Summary

To sum up, what I am trying to do is to simply contribute to the world of objective technical analysis which is promoting more transparent techniques and strategies that need to be back-tested before being implemented. This way, technical analysis will get rid of the bad reputation of being subjective and scientifically unfounded.

I recommend you always follow the the below steps whenever you come across a trading technique or strategy:

Have a critical mindset and get rid of any emotions.
Back-test it using real life simulation and conditions.
If you find potential, try optimizing it and running a forward test.
Always include transaction costs and any slippage simulation in your tests.
Always include risk management and position sizing in your tests.

Finally, even after making sure of the above, stay careful and monitor the strategy because market dynamics may shift and make the strategy unprofitable.