# Algorithmic Chart Pattern Detection

Traders using technical analysis attempt to profit from supply and demand imbalances. Technicians use price and volume patterns to identify these potential imbalances to profit from them. Algorithmic chart pattern detection allows a trader to scan more charts while simultaneously eliminating bias.

In this post, I’m going to go over how to detect chart patterns algorithmically, and create a quick backtest in Backtrader. This work expands on posts found on Alpaca and Quantopian analyzing the paper Foundations of Technical Analysis.

Before we get started, you’ll want to grab data. If you do not have a data provider, you can grab a free Intrinio developer sandbox.

## Get The Data

import pandas as pd
from positions.securities import get_security_data
aapl = get_security_data('AAPL', start='2020-03-01', end='2020-03-31')
print(aapl)

               open      high     low   close     volume
date
2020-03-02  282.280  301.4400  277.72  298.81   85349339
2020-03-03  303.670  304.0000  285.80  289.32   79868852
2020-03-04  296.440  303.4000  293.13  302.74   54794568
2020-03-05  295.520  299.5500  291.41  292.92   46893219
2020-03-06  282.000  290.8200  281.23  289.03   56544246
2020-03-09  263.750  278.0900  263.00  266.17   71686208
2020-03-10  277.140  286.4400  269.37  285.34   71322520
2020-03-11  277.390  281.2200  271.86  275.43   64094970
2020-03-12  255.940  270.0000  248.00  248.23  104618517
2020-03-13  264.890  279.9200  252.95  277.97   92683032
2020-03-16  241.950  259.0800  240.00  242.21   80605865
2020-03-17  247.510  257.6100  238.40  252.86   81013965
2020-03-18  239.770  250.0000  237.12  246.67   75058406
2020-03-19  247.385  252.8400  242.61  244.78   67964255
2020-03-20  247.180  251.8300  228.00  229.24  100423346
2020-03-23  228.080  228.4997  212.61  224.37   84188208
2020-03-24  236.360  247.6900  234.30  246.88   71882773
2020-03-25  250.750  258.2500  244.30  245.52   75900510
2020-03-26  246.520  258.6800  246.36  258.44   63140169
2020-03-27  252.750  255.8700  247.05  247.74   51054153
2020-03-30  250.740  255.5200  249.40  254.81   41994110
2020-03-31  255.600  262.4900  252.00  254.29   49250501


## Find the Minama and Maxima

Chart patterns can be determined from local minima and maxima. From a technical analysis perspective, this is really just the highs and the lows.

We can find the price high and lows using scipy.signal.argregexterma.

argrelextrema takes in an an ndarray and a comparable, and returns a tuple with an array of the results. The comparables we’ll use will be np.greater and np.less. Here’s a simple example for demonstration purposes:

from scipy.signal import argrelextrema
x = np.array([2, 1, 2, 3, 2, 0, 1, 0])
argrelextrema(x, np.greater)

(array([3, 6]),)


Notice how the 4th and 6th element are the relative highs – remember arrays start with zero. The same goes for our lows.

from scipy.signal import argrelextrema
x = np.array([2, 1, 2, 3, 2, 0, 1, 0])
argrelextrema(x, np.less)

(array([1, 5]),)


With an undertanding of how to calculate our highs and lows, let’s do the same with Apple’s price data. We’ll grab the first element of the tuple returned by argrelextrema.

local_max = argrelextrema(aapl['high'].values, np.greater)[0]
local_min = argrelextrema(aapl['low'].values, np.less)[0]
print(local_max)
print(local_min)


This gives us the index position of the relative highs and lows. Let’s verify this.

[ 1  6  9 13 18]
[ 5  8 12 15]


We can index Apple’s rows by integer. We’ll then check out TradingView to see if our results match up.

highs = aapl.iloc[local_max,:]
lows = aapl.iloc[local_min,:]

print(highs)
print(lows)

date
2020-03-03    304.00
2020-03-10    286.44
2020-03-13    279.92
2020-03-19    252.84
2020-03-26    258.68
Name: high, dtype: float64
date
2020-03-09    263.00
2020-03-12    248.00
2020-03-18    237.12
2020-03-23    212.61
Name: low, dtype: float64


While not as pretty, we can also graph it in Matplotlib.

import matplotlib.pyplot as plt
fig = plt.figure(figsize=[20,14])
highslows = pd.concat([highs,lows])
aapl['high'].plot()
aapl['low'].plot()
plt.scatter(highslows.index,highslows)


We can use the local minima and maxima to determine trend changes. We’ll use the papers notation when discussing extrema.

Where $E_t$ is a local extrema with price $P_t$. Therefore, we can now determine uptrends and downtrends based on local extrema. An uptrend consists of higher highs and higher lows. A downtrend consts of lower highs and lower lows. Here are the formulas for an uptrend and a downtrend respectively.

Uptrend: $$E_1 < E_3 and E_2 < E_4$$

Downtrend: $$E_1 > E_3 and E_2 > E_4$$

## Smoothing the Noise

In the paper, Andrew Lo uses smoothing and non-parametric kernel regression with the idea of reducing the noise in the price action. Don’t worry, we’ll dig into what non-parametric kernel regression is in a minute. For now, let’s smooth out Apple’s prices. We’ll use pandas.series.rolling for this purpose using a window of 2.

fig = plt.figure(figsize=[20,14])
aapl['close'].plot()
aapl['close'].rolling(window=5).mean().plot()


Notice how the graph becomes smoother even though we lose some data.

### Non-Parametric Kernel Regression

Let’s analyze this statistical term word by word:

1. Nonparametric means the data does not fit a normal distribution. We know this. Stock price prediction is complex.
2. In nonparametric statistics, a kernel is a weighting function.
3. A regression predicts the value of predictor based on information in the data.

Non-parametric kernel regression is another way to smooth our prices. The idea is that we approximate a price average based on prices near the predicted price using a weighting the closest prices more heavily.

So what does this look like with code?


from statsmodels.nonparametric.kernel_regression import KernelReg
kr = KernelReg(prices_.values, prices_.index, var_type='c')
f = kr.fit([prices_.index.values])
aapl['close'].rolling(window=4).mean().plot()
smooth_prices = pd.Series(data=f[0], index=aapl.index)
smooth_prices.plot()


Notice how we don’t lose data. We can also adjust the bandwidth to change the fit.

from statsmodels.nonparametric.kernel_regression import KernelReg
kr = KernelReg(prices_.values, prices_.index, var_type='c', bw=[1])
kr2 = KernelReg(prices_.values, prices_.index, var_type='c', bw=[3])
f = kr.fit([prices_.index.values])
f2 = kr2.fit([prices_.index.values])

smooth_prices = pd.Series(data=f[0], index=aapl.index)
smooth_prices2 = pd.Series(data=f2[0], index=aapl.index)
smooth_prices.plot()
smooth_prices2.plot()


Let’s find our local maxima and minima using the smoothed prices using kernel regression with a bandwidth of 0.85.

kr = KernelReg(prices_.values, prices_.index, var_type='c', bw=[0.85])
f = kr.fit([prices_.index.values])
smooth_prices = pd.Series(data=f[0], index=aapl.index)
smoothed_local_maxima = argrelextrema(smooth_prices.values, np.greater)[0]
print(smoothed_local_maxima)
print(local_maxima)

[ 2  6 18]
[ 1  6  9 13 18]


Notice that we now skip over local minima and maxima that may be considered noise.

With our smoothed prices, let’s get loop through the extrema and grab the highest value in a two day window before and after our exterema.

price_local_max_dt = []
for i in smoothed_local_max:
if (i>1) and (i<len(aapl)-1):
price_local_max_dt.append(aapl['close'].iloc[i-2:i+2].idxmax())

price_local_min_dt = []
for i in smoothed_local_min:
if (i>1) and (i<len(aapl)-1):
price_local_min_dt.append(aapl['close'].iloc[i-2:i+2].idxmin())

max_min = pd.concat([aapl.loc[price_local_min_dt, 'close'], aapl.loc[price_local_max_dt, 'close']])
aapl['close'].plot()
plt.scatter(max_min.index, max_min.values, color='orange')


Let’s put everything we’ve done so far into a function.

from scipy.signal import argrelextrema
from statsmodels.nonparametric.kernel_regression import KernelReg

def find_extrema(s, bw='cv_ls'):
"""
Input:
s: prices as pd.series
bw: bandwith as str or array like
Returns:
prices: with 0-based index as pd.series
extrema: extrema of prices as pd.series
smoothed_prices: smoothed prices using kernel regression as pd.series
smoothed_extrema: extrema of smoothed_prices as pd.series
"""
# Copy series so we can replace index and perform non-parametric
# kernel regression.
prices = s.copy()
prices = prices.reset_index()
prices.columns = ['date', 'price']
prices = prices['price']

kr = KernelReg([prices.values], [prices.index.to_numpy()], var_type='c', bw=bw)
f = kr.fit([prices.index])

# Use smoothed prices to determine local minima and maxima
smooth_prices = pd.Series(data=f[0], index=prices.index)
smooth_local_max = argrelextrema(smooth_prices.values, np.greater)[0]
smooth_local_min = argrelextrema(smooth_prices.values, np.less)[0]
local_max_min = np.sort(np.concatenate([smooth_local_max, smooth_local_min]))
smooth_extrema = smooth_prices.loc[local_max_min]

# Iterate over extrema arrays returning datetime of passed
# prices array. Uses idxmax and idxmin to window for local extrema.
price_local_max_dt = []
for i in smooth_local_max:
if (i>1) and (i<len(prices)-1):
price_local_max_dt.append(prices.iloc[i-2:i+2].idxmax())

price_local_min_dt = []
for i in smooth_local_min:
if (i>1) and (i<len(prices)-1):
price_local_min_dt.append(prices.iloc[i-2:i+2].idxmin())

maxima = pd.Series(prices.loc[price_local_max_dt])
minima = pd.Series(prices.loc[price_local_min_dt])
extrema = pd.concat([maxima, minima]).sort_index()

# Return series for each with bar as index
return extrema, prices, smooth_extrema, smooth_prices


Let’s use Matplotlib to visualize the output.

def plot_window(prices, extrema, smooth_prices, smooth_extrema, ax=None):
if ax is None:
fig = plt.figure()

prices.plot(ax=ax, color='dodgerblue')
ax.scatter(extrema.index, extrema.values, color='red')
smooth_prices.plot(ax=ax, color='lightgrey')
ax.scatter(smooth_extrema.index, smooth_extrema.values, color='lightgrey')

plot_window(prices, extrema, smooth_prices, smooth_extrema)


## Pattern Identification

I will use the pattern definitions from Foundations of Technical Analysis. The code is largely taken from the Quantopian post mentioned earlier with a few adjustments to fit my needs.

from collections import defaultdict

def find_patterns(s, max_bars=35):
"""
Input:
s: extrema as pd.series with bar number as index
max_bars: max bars for pattern to play out
Returns:
patterns: patterns as a defaultdict list of tuples
containing the start and end bar of the pattern
"""
patterns = defaultdict(list)

# Need to start at five extrema for pattern generation
for i in range(5, len(extrema)):
window = extrema.iloc[i-5:i]

# A pattern must play out within max_bars (default 35)
if (window.index[-1] - window.index[0]) > max_bars:
continue

# Using the notation from the paper to avoid mistakes
e1 = window.iloc[0]
e2 = window.iloc[1]
e3 = window.iloc[2]
e4 = window.iloc[3]
e5 = window.iloc[4]

rtop_g1 = np.mean([e1,e3,e5])
rtop_g2 = np.mean([e2,e4])
if (e1 > e2) and (e3 > e1) and (e3 > e5) and \
(abs(e1 - e5) <= 0.03*np.mean([e1,e5])) and \
(abs(e2 - e4) <= 0.03*np.mean([e1,e5])):
patterns['HS'].append((window.index[0], window.index[-1]))

elif (e1 < e2) and (e3 < e1) and (e3 < e5) and \
(abs(e1 - e5) <= 0.03*np.mean([e1,e5])) and \
(abs(e2 - e4) <= 0.03*np.mean([e1,e5])):
patterns['IHS'].append((window.index[0], window.index[-1]))

elif (e1 > e2) and (e1 < e3) and (e3 < e5) and (e2 > e4):
patterns['BTOP'].append((window.index[0], window.index[-1]))

elif (e1 < e2) and (e1 > e3) and (e3 > e5) and (e2 < e4):
patterns['BBOT'].append((window.index[0], window.index[-1]))

# Triangle Top
elif (e1 > e2) and (e1 > e3) and (e3 > e5) and (e2 < e4):
patterns['TTOP'].append((window.index[0], window.index[-1]))

# Triangle Bottom
elif (e1 < e2) and (e1 < e3) and (e3 < e5) and (e2 > e4):
patterns['TBOT'].append((window.index[0], window.index[-1]))

# Rectangle Top
elif (e1 > e2) and (abs(e1-rtop_g1)/rtop_g1 < 0.0075) and \
(abs(e3-rtop_g1)/rtop_g1 < 0.0075) and (abs(e5-rtop_g1)/rtop_g1 < 0.0075) and \
(abs(e2-rtop_g2)/rtop_g2 < 0.0075) and (abs(e4-rtop_g2)/rtop_g2 < 0.0075) and \
(min(e1, e3, e5) > max(e2, e4)):

patterns['RTOP'].append((window.index[0], window.index[-1]))

# Rectangle Bottom
elif (e1 < e2) and (abs(e1-rtop_g1)/rtop_g1 < 0.0075) and \
(abs(e3-rtop_g1)/rtop_g1 < 0.0075) and (abs(e5-rtop_g1)/rtop_g1 < 0.0075) and \
(abs(e2-rtop_g2)/rtop_g2 < 0.0075) and (abs(e4-rtop_g2)/rtop_g2 < 0.0075) and \
(max(e1, e3, e5) > min(e2, e4)):
patterns['RBOT'].append((window.index[0], window.index[-1]))

return patterns

patterns = find_patterns(extrema)
print(patterns)

defaultdict(<class 'list'>, {'BTOP': [(14, 28)], 'BBOT': [(16, 39)]})


It looks like Apple’s prices contained both a broadening top and bottom. While having a small amount of data made things easier to see at first, let’s up the ante and detect the patterns within ten years of Google price data. I increased the non-parametric kernel regression bandwidth to 1.5.

googl = get_security_data('GOOGL', start='2019-01-01', end='2020-01-31')
prices, extrema, smooth_prices, smooth_extrema = find_extrema(googl['close'], bw=[1.5])
patterns = find_patterns(extrema)

for name, pattern_periods in patterns.items():
print(f"{name}: {len(pattern_periods)} occurences")

HS: 2 occurences
TBOT: 3 occurences
TTOP: 1 occurences
RTOP: 1 occurences
BBOT: 1 occurences
BTOP: 1 occurences


Let’s graph the head and shoulder patterns.

for name, pattern_periods in patterns.items():
if name=='HS':
print(name)

rows = int(np.ceil(len(pattern_periods)/2))
f, axes = plt.subplots(rows,2, figsize=(20,5*rows))
axes = axes.flatten()
i = 0
for start, end in pattern_periods:
s = prices.index[start-1]
e = prices.index[end+1]

plot_window(prices[s:e], extrema.loc[s:e],
smooth_prices[s:e],
smooth_extrema.loc[s:e], ax=axes[i])
i+=1
plt.show()


These do indeed look like head and shoulder patterns. Remember, the far right edge will have the top of the shoulder. Additionally, if you’re not happy with the pattern definitions, you’re able to change them!

While I’ve already created a Backtrader Backtesting Quickstart, I thought it might be nice to demonstrate how to take some of the above code and turn it into an indicator.

import pandas as pd
import numpy as np
from scipy.signal import argrelextrema
from positions.securities import get_security_data

class Extrema(bt.Indicator):
'''
Find local price extrema. Also known as highs and lows.

Formula:
- https://docs.scipy.org/doc/scipy/reference/generated/scipy.signal.argrelextrema.html

- https://analyzingalpha.com/algorithmic-pattern-detection

Aliases: None
Inputs: high, low
Outputs: he, le
Params:
- period N/A
'''
lines = 'lmax',  'lmin'

def next(self):

# Get all days using ago with length of self
past_highs = np.array(self.data.high.get(ago=0, size=len(self)))
past_lows = np.array(self.data.low.get(ago=0, size=len(self)))

# Use argrelextrema to find local maxima and minima
last_high_days = argrelextrema(past_highs, np.greater)[0] \
if past_highs.size > 0 else None
last_low_days = argrelextrema(past_lows, np.less)[0] \
if past_lows.size > 0 else None

# Get the day of the most recent local maxima and minima
last_high_day = last_high_days[-1] \
if last_high_days.size > 0 else None
last_low_day = last_low_days[-1] \
if last_low_days.size > 0 else None

# Use local maxima and minima to get prices
last_high_price = past_highs[last_high_day] \
if last_high_day else None
last_low_price = past_lows[last_low_day] \
if last_low_day else None

# If local maxima have been found, assign them
if last_high_price:
self.l.lmax[0] = last_high_price

if last_low_price:
self.l.lmin[0] = last_low_price


## Wrapping Up

It does appear that certain technical patterns have predictive power. We can use code to detect these patterns and exploit them on multiple timeframes. As always, the code can be found on GitHub.

#### Leo Smigel

Based in Pittsburgh, Analyzing Alpha is a blog by Leo Smigel exploring what works in the markets.