In the Eyes of the Beholder: A Fuzzy Logic Based Approach to Technical Analysis of Visual Patterns

One of the most challenging areas in technical analysis is the automatic detection of technical patterns that are similar in the eyes of experts. Such a detection process should closely resemble or capture human cognitive abilities or even intuition. We incorporate human cognitive uncertainty into the technical analysis by using a fuzzy logic based approach. The results show that our approach is able to detect subtle differences within a clearly defined pattern. We find significant post-pattern abnormal returns for stocks with the occurrence of certain technical patterns and such abnormal returns vary directly with the fuzziness of a pattern.