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5 Pattern Recognition Criteria

While looking at a chart can often tell you whether a stock is appropriate for swing

trading, it is very time consuming to look at charts, particularly if you look for

opportunities every day. Another way to identify good stocks is to use software that

can scan all of the listed stocks based on a series of algebraic equations that

represent the characteristics of a good chart pattern. I use SwingTracker to

accomplish this task.

Before discussing the specifics of pattern recognition criteria, we’ll briefly

consider the measures used in the algebraic equations. Some of the measures are

simple descriptive variables (e.g., the high price for the previous day or the average

volume over the past 20 days). Other measures are based on technical analysis

which is discussed in more detail in the Appendix. Technical analysis has many

different indicators from a simple moving average to a complex oscillator. It is not

necessary to have an in-depth understanding of technical analysis to be a successful

swing trader, however, it is helpful to have a rudimentary understanding of how we

approach swing trading pattern recognition.