An Analysis of Harmonic Patterns in the Time Series of the Forex Market

Authors

  • Leandro Coelho de Souza
  • Victor Silveria Ribeiro
  • Diego Frias Suarez

DOI:

https://doi.org/10.46814/lajdv3n3-052

Abstract

A challenging environment for research is the behavior of the financial market's time series, especially the stock market and the Forex market, which specializes in currency exchange negotiations. Price fluctuation in both markets have been found to be non-linear, stochastic or temporarily chaotic time series, as well as classified as a complex system. The adaptability and robustness characteristics of complex systems are reflected in the financial market creating waves in asset prices.  For this reason, the temporal evolution of prices presents a shape similar to a sequence of waves of different periods and amplitudes. Some traders have noted that two consecutive waves form a pattern similar to M, and that by moving forward a quarter of the first wave period, a pattern similar to W is obtained. It has been reported from unverified sources that these oscillatory patterns, called harmonics, are often found in stock prices and foreign exchange. Therefore, these standards are currently being used as technical indicators for traders. However, there is no mathematical-statistical systematic to account for the frequency of occurrence of harmonic patterns, just as there is no generalized parametric characterization of harmonic patterns type M and W in the reviewed literature consulted. In this article, we address these two cognitive gaps in this important field of knowledge. First, we describe the morphological characteristics of the most popular harmonic patterns, followed by a discrete parameterization that allows to assign an integer to each harmonic pattern. Finally, implementing a simple method, dependent on a parameter, for detecting peaks and values of price waves, we search for harmonic patterns in different currency regions, accounting for the frequency of occurrence of each of them. From the association of popular patterns with the corresponding number in the classification introduced, we conclude that only one of the popular patterns has a probability of occurrence beyond the trivial, at the same time that we identify the most frequent patterns in the studied assets.

Published

2021-07-01

How to Cite

DE SOUZA, L. C. .; RIBEIRO, V. S. .; SUAREZ, D. F. . An Analysis of Harmonic Patterns in the Time Series of the Forex Market. Latin American Journal of Development, [S. l.], v. 3, n. 3, p. 1688–1698, 2021. DOI: 10.46814/lajdv3n3-052. Disponível em: https://latinamericanpublicacoes.com.br/ojs/index.php/jdev/article/view/409. Acesso em: 27 may. 2022.