Trading Techniques  |  OCT 1998

Combining Statistical and Pattern Analysis by Walter T. Downs

Patterns are one of the oldest forms of technical analysis. Yet, because patterns can often be subjective, few of us take the time to combine statistical information with this type of market analysis. Mathematical definition and detailed statistical analysis allow us to test patterns, giving us a unique view of one particular stage of a market. We refer to the quantified use and study of repetitive price formations as advanced pattern recognition theory (APRT). Let us discuss some key factors found in APRT patterns and then analyze an example of a pattern we have found. KEY PATTERN TRAITS Patterns display repetitive characteristics. They are related to five distinct factors. The first three factors refer to the type of market action to be expected. An expansion factor means that the market can be expected to move rapidly out of the pattern in a specific direction. A contraction factor means price action that has diminished to a small point, and a transition factor is a point of change between contraction and expansion.

by Walter T. Downs, Ph.D.