Stock market trading rule discovery using pattern recognition and technical analysis

This study examines the potential profit of bull flag technical trading rules using a template matching technique based on pattern recognition for the Nasdaq Composite Index (NASDAQ) and Taiwan Weighted Index (TWI). To minimize measurement error due to data snooping, this study performed a series of experiments to test the effectiveness of the proposed method. The empirical results indicated that all of the technical trading rules correctly predict the direction of changes in the NASDAQ and TWI. This finding may provide investors with important information on asset allocation. Moreover, better bull flag template price fit is associated with higher average return. The empirical results demonstrated that the average return of trading rules conditioned on bull flag significantly better than buying every day for the study period, especially for TWI. (c) 2006 Elsevier Ltd. All rights reserved.