I have been building out some algorithms that rely on detecting “consolidation”. Chartists know what that looks like, but the term by itself is extremely vague to a quant. What to do?
I have often thought about the method used in creating “The encyclopedia of chart patterns” and wondered if such could be used as part of an automated strategy. I read somewhere that the source code for the application used to build the data in that book was written in VB, and was for his personal use. Sad, but I would have probably done the same thing.
Today I began reading “Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation” (2000) by Lo, Mamaysky, and Wang. What a great paper. It details some of the technical challenges of building such algorithms.
What I like of the paper is that it picked one smoothing algorithm, and basically said “we picked it and went with it, right or wrong”. My interpretation of that is “you can take this further, but we wanted to give you enough information to get you started”. Kudos to the authors.
Is it worth the effort to implement? Time will tell. But it certainly helped me get my head around some of the intricacies of smoothing estimators and finding optimal values for them.