Chart Pattern Recognition in Python
Creating a Trading Pattern Recognition Strategy Using K’s Candlesticks
Candlestick patterns deserve to be studied thoroughly and even though a strategy relying solely on them will be unstable and unprofitable, they can be a valuable addition into a full trading system that uses other techniques. In this article, we will see a full presentation and code of the Doji pattern on an alternative charting system.
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Standard Charting Systems
This section will deal with the import of OHLC historical data and charting chandlesticks. One of the most famous trading platforms in the retail community is the MetaTrader5 software. It is a powerful tool that comes with its own programming language and its huge online community support. It also offers the possibility to export its historical short-term and long-term FX data.
The first thing we need to do is to simply download the platform from the official website. Then, after creating the demo account, we are ready to import the library in Python that allows to import the OHLC data from MetaTrader5.
A library is a group of structured functions that can be imported into our Python interpreter from where we can call and use the ones we want.
The easiest way to install the MetaTrader5 library is to go to the Python prompt on our computer and type:
pip install MetaTrader5This should install the library in our local Python. Now, we want to import it to the Python interpreter (such as Pycharm or SPYDER) so that we can use it. Let us actually import all the libraries we will be using for this:
import datetime # Date acquiring
import pytz # Time zone management
import pandas as pd # Mostly for Data frame manipulation
import MetaTrader5 as mt5 # Importing OHLC data
import matplotlib.pyplot as plt # Plotting charts
import numpy as np # Mostly for array manipulationAnything that comes after “as” is a shortcut. The plt shortcut is there so that each time we want to call a function from that library we do not have to type the full matplotlib.pyplot statement. The official documentation for the Metatrader5 libary can be found here.
The first thing we can do is to select which time frame we want to import. Let us suppose that there are only two time frames, the 30-minute and the hourly bars. We can therefore create variables that hold the statement to tell the MetaTrader5 library which time frame we want.
# Choosing the 30-minute time frame
frame_M30 = mt5.TIMEFRAME_M30# Choosing the hourly time frame
frame_H1 = mt5.TIMEFRAME_H1Then, by staying in the spirit of importing variables, we can define the variable that states what date is it now. This helps the algorithm know the stopping date of the import. We can do this by the simple line of code below.
# Defining the variable now to give out the current date
now = datetime.datetime.now()Note that these code snippets are better used chronologically, hence, I encourage you to copy them in order and then execute them one by one so that you understand the evolution of what you are doing. The below is a function that holds which assets we want. Generally, I use 10 or more but for simplicity, let us consider that there are only two currency pairs: EURUSD and USDCHF.
def asset_list(asset_set):
if asset_set == 'FX':assets = ['EURUSD', 'USDCHF']
return assetsNow, with the key function that gets us the OHLC data. The below establishes a connection to MetaTrader5, applies the current date, and extracts the needed data. Notice the arguments year, month, and day. These will be filled by us to select from when do we want the data to start. Note, I have inputed Europe/Paris as my time zone, you should use your time zone to get more accurate data.
def get_quotes(time_frame, year = 2005, month = 1, day = 1, asset = "EURUSD"):
# Establish connection to MetaTrader 5
if not mt5.initialize():
print("initialize() failed, error code =", mt5.last_error())
quit()
timezone = pytz.timezone("Europe/Paris")
utc_from = datetime.datetime(year, month, day, tzinfo = timezone)
utc_to = datetime.datetime(now.year, now.month, now.day + 1, tzinfo = timezone)
rates = mt5.copy_rates_range(asset, time_frame, utc_from, utc_to)
rates_frame = pd.DataFrame(rates)return rates_frameAnd finally, the last function we will use is the one that uses the below get_quotes function and then cleans the results so that we have a nice array. We have selected data since January 2019 as shown below.
def mass_import(asset, horizon):
if horizon == 'M30':
data = get_quotes(frame_M30, 2019, 1, 1, asset = assets[asset])
data = data.iloc[:, 1:5].values
data = data.round(decimals = 5)return dataFinally, we are done building the blocks necessary to import the data. To import EURUSD OHLC historical data, we simply use the below code line:
# Choosing the horizon
horizon = 'M30'# Creating an array called EURUSD having M30 data since 2019
EURUSD = mass_import(0, horizon)And voila, now we have the EURUSD OHLC data from 2019. Now let us see how to transform the data into candles.
Candlestick charts are among the most famous ways to analyze the time series visually. They contain more information than a simple line chart and have more visual interpretability than bar charts. Many libraries in Python offer charting functions but being someone who suffers from malfunctioning import of libraries and functions alongside their fogginess, I have created my own simple function that charts candlesticks manually with no exogenous help needed.
OHLC data is an abbreviation for Open, High, Low, and Close price. They are the four main ingredients for a timestamp. It is always better to have these four values together so that our analysis reflects more the reality. Here is a table that summarizes the OHLC data of hypothetical security:
Our job now is to plot the data so that we can visually interpret what kind of trend is the price following. We will start with the basic line plot before we move on to candlestick plotting.
Note that you can download the data manually or using Python. In case you have an excel file that has OHLC only data starting from the first row and column, you can import it using the below code snippet:
import numpy as np
import pandas as pd# Importing the OHLC Historical Data in Excel format
my_ohlc_data = pd.read_excel('my_ohlc_data.xlsx')# Converting to Array
my_ohlc_data = np.array(my_ohlc_data)Plotting basic line plots is extremely easy in Python and requires only one line of code. We have to make sure that we have imported a library called matplotlib and then we will call a function that plots the data for us.
# Importing the necessary charting library
import matplotlib.pyplot as plt# The syntax to plot a line chart
plt.plot(my_data[-100:, 3], color = 'black', label = 'EURUSD')# The syntax to add the label created above
plt.legend()# The syntax to add a grid
plt.grid()
Now that we have seen how to create normal line charts, it is time to take it to the next level with candlestick charts. The way to do this with no complications is to think about vertical lines. Here is the intuition (followed by an application of the function below):
Select a lookback period. This is the number of values you want to appear on the chart.
Plot vertical lines for each row representing the highs and lows. For example, on OHLC data, we will use a matplotlib function called vlines which plots a vertical line on the chart using a minimum (low) value and a maximum (high value).
Make a color condition which states that if the closing price is greater than the opening price, then execute the selected block of code (which naturally contains the color green). Do this with the color red (bearish candle) and the color black (Doji candle).
Plot vertical lines using the conditions with the min and max values representing closing prices and opening prices. Make sure to make the line’s width extra big so that the body of the candle appears sufficiently enough that the chart is deemed a candlestick chart.
def ohlc_plot(Data, window, name):
Chosen = Data[-window:, ]
for i in range(len(Chosen)):
plt.vlines(x = i, ymin = Chosen[i, 2], ymax = Chosen[i, 1], color = 'black', linewidth = 1)
if Chosen[i, 3] > Chosen[i, 0]:
color_chosen = 'green'
plt.vlines(x = i, ymin = Chosen[i, 0], ymax = Chosen[i, 3], color = color_chosen, linewidth = 4)if Chosen[i, 3] < Chosen[i, 0]:
color_chosen = 'red'
plt.vlines(x = i, ymin = Chosen[i, 3], ymax = Chosen[i, 0], color = color_chosen, linewidth = 4)
if Chosen[i, 3] == Chosen[i, 0]:
color_chosen = 'black'
plt.vlines(x = i, ymin = Chosen[i, 3], ymax = Chosen[i, 0], color = color_chosen, linewidth = 4)
plt.grid()
plt.title(name)# Using the function
ohlc_plot(my_ohlc_data, 50, '')
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K’s Candlestick Chart
A simple transformation of candlestick charts that I have found to be useful lies with moving averages. To create the K’s Candlestick chart, we need to transform the prices using the simple moving average formula. The steps are relatively easy:
Calculate a 3-period Simple Moving Average of the opening price.
Calculate a 3-period Simple Moving Average of the high price.
Calculate a 3-period Simple Moving Average of the low price.
Calculate a 3-period Simple Moving Average of the close price.
Then, we will treat the new four columns as the candlestick data while being careful from using them in trading as they are not real prices, but simple moving averages. We are interested in visually interpreting them and determining candlestick patterns which work better using this technique. The charts below show the difference between the normal candlestick chart and the K’s candlestick chart.
The above charts show the EURUSD charted differently. We can notice how smoother the K’s candlestick chart is compared to the noisy regular chart. By noisy, the meaning here is on the interpretability of the trend. When successive red or green candles are observed, the trend is easier to be determined.
We can tweak the lookback period of the moving average, but I recommend 2 or 3 lookback periods.
It becomes clear that we are interested in two things when analyzing the market using K’s Candlesticks:
Interpretability of the trend: Similar to the Heikin-Ashi, the K’s Candlestick chart smoothes out the data in order to remove the short-term noise and to deliver a clearer picture of the current trend.
Pattern Recognition: Doji and exhaustion patterns are more prevalent in the K’s candlesticks and therefore add a confirmation factor. They also work better than in regular charts according to my experience.
The below is the syntax to create the K’s candlestick charts using moving averages.
def ma(Data, lookback, close, where):Data = adder(Data, 1)for i in range(len(Data)):try:
Data[i, where] = (Data[i - lookback + 1:i + 1, close].mean())
except IndexError:
pass# Cleaning
Data = jump(Data, lookback)
return Datadef k_candlesticks(Data, opening, high, low, close, lookback, where):
# Adding the necessary columns
Data = adder(Data, 4)
# Averaging the Open
Data = ma(Data, lookback, opening, where)
# Averaging the High
Data = ma(Data, lookback, high, where + 1)
# Averaging the Low
Data = ma(Data, lookback, low, where + 2)
# Averaging the Close
Data = ma(Data, lookback, close, where + 3)
return Data
The K’s Doji
The Bullish Doji pattern is composed of a candle that has its closing price equal to its opening price. It usually occurs after downward trending price action and is considered a bullish reversal or a correction pattern.
The Bullish Doji pattern is based on the psychology that the balance of power has been equalized after trending in one direction. Theoretically, we are supposed to buy at the close of the second and last candle to validate the pattern. For a bullish Doji pattern to be valid, we need a bullish candle after it.
The Bearish Doji pattern is composed of a candle that has its closing price equal to its opening price. It usually occurs after upward trending price action and is considered a bearish reversal or a correction pattern.
The Bearish Doji pattern is based on the psychology that the balance of power has been equalized after trending in one direction. Theoretically, we are supposed to sell at the close of the second and last candle to validate the pattern. For a bearish Doji pattern to be valid, we need a bearish candle after it.
Creating a Scanning Algorithm
Our aim is to create an algorithm that detects this pattern and places theoretical buy and sell orders. But first, we need to code the intuition of the pattern. Let us review what we will need for the bullish Doji pattern:
The K’s closing price equals the K’s opening price.
The current close is below the last close and the one prior to it.
The previous candle is not a Doji.
Similarly, for the bearish Doji pattern, we need the following conditions:
The K’s closing price equals the K’s opening price.
The current close is above the last close and the one prior to it.
The previous candle is not a Doji.
def signal(Data, opening, close, buy, sell):
for i in range(len(Data)):
# Bullish Doji
if Data[i, close] == Data[i, opening] and Data[i, close] < Data[i - 1, close] and Data[i, close] < Data[i - 2, close] and \
Data[i - 1, buy] == 0:
Data[i, buy] = 1
# Bearish Doji
if Data[i, close] == Data[i, opening] and Data[i, close] > Data[i - 1, close] and Data[i, close] > Data[i - 2, close] and \
Data[i - 1, sell] == 0:
Data[i, sell] = -1
return Data
The above function takes an OHLC data array with multiple empty columns to spare and populates columns 6 (Buy) and 7 (Sell) with the conditions that we discussed earlier. We want to input 1’s in the column we call “buy” and -1 in the column we call “sell”.
This later allows you to create a function that calculates the profit and loss by looping around these two columns and taking differences in the market price to find the profit and loss of a close-to-close strategy. Then you can use a risk management function that uses stops and profit orders.
The red arrows point to a sell short signal while the green arrows point to a buy signal based on the closing prices. The next step is evaluating the signal quality.
The above charts show the signals found using the K’s Candlesticks superimposed on the regular charts on the right while respecting the same time period.
Make sure to focus on the concepts and not the code. The most important thing is to comprehend the techniques and strategies. The code is a matter of execution but the idea is something you cook in your head for a while.
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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.