How Effective is Pattern Recognition Software?

[Henry Thomason 10]

While many of us spend months and years perfecting our trading strategies, there are individuals who swear by the use of software that can act independently, seeking out patterns and projecting where the price might move to without any input. In theory, these systems are an excellent idea, because they can work faster, and multitask in ways that a human cannot. There is of course a considerable amount of debate surrounding their use, and how effective they really are. It’s important to question them, and look at how they can be used in order to incorporate them into your strategy.

 

One of the main things to think about is the trust that you’re likely to be putting in the computer. This is something that people have argued as a negative aspect, but in reality, this is entirely down to the end user. The issue is that if you simply follow the instruction of the computer, you could be getting yourself into trouble. While the computer can accurately monitor price action, levels of support and resistance, and a number of other parameters, it cannot account for fundamental knowledge. This is to say that an announcement that a human might be fully expecting cannot be seen by the computer. The responsibility therefore lies with the trader to make the final call. You have to double check the position is viable before you make it, just like with any other trade. Do not blindly trust the computer; it is an effective aid, not an automatic money-making machine.

Increase Productivity

 

Aside from this potential problem, it does seem as though pattern recognisers are really quite advanced. As already indicated, they are able to monitor far more information than a trader possibly can. Most of these kinds of software will update you several times an hour, with whatever opportunities they have found. They can also monitor a huge number of financial instruments; far more than you could accurately keep tabs on. Of course, you can set the program to notify you of whatever you like, but this is an example of just how expansive the software can be.

 

The obvious benefit of being able to monitor extra instruments is that you’re given far more opportunities to trade. It will still require a high level of market understanding from the person using it, but you will be able to see when signals present themselves over a great number of currencies for instance. Primarily, this means that you are able to choose the more profitable positions, and also mitigate risk. There are two reasons for this:

 

• Firstly, the more options that you’ve got, the more likely one is to be successful. You can quickly go through all of the potential trading opportunities, and if you wish, you can put a greater focus on perhaps one or two of the signals. This is a good way of maximising profit. If you’d just been manually monitoring a handful of charts, then you may well be missing out on a better opportunity somewhere else in the market. Recognition software will help you overcome this potential problem.

 

• The second potential benefit of having a wider range of suitable opportunities is that you can spread your investment over a wider area. Putting all of your eggs in the proverbial basket runs the risk of losing a significant amount, should the signal prove to be inaccurate. However, you’re less likely to lose money if your investment is spread out over several positions you are confident in. Of course, this isn’t quite as profitable.

 

Now, as we’ve already mentioned, you can customise what recognition software actually looks for, and this is very important. If you already have a sound strategy, then this kind of program should be used to compliment it, not change it. What we mean by this, is that you should set the pattern recogniser to notify you of signals that you would look for yourself. If you allow it to look for anything, you’re changing your strategy, and this could prove to be problematic and unprofitable.

 

Forex Trading Success

 

Success rates for forex trading software in particular, are actually very high indeed. In most cases, you’ll actually find that the price does not move into the predicted range in only 25 to 30 percent of the time. While this does appear to be a relatively high amount, it does mean that you can expect around three quarters of all notifications to be accurate. It’s up to you to ensure that you’re still analysing each one on its own merits – you don’t want to end up trading only the 25 percent of unprofitable notifications.

 

To conclude, pattern recognition software won’t do the hard work for you, but it will present you with a wide range of potential positions, which if used wisely, can be extremely effective.