Searching for Head and Shoulders Bottom Patterns under Directional Changes

Head and Shoulder pattern is a well-known technical trading strategy. However, what exactly constitutes a Head and Shoulder pattern under time series is sometimes ambiguous. In this thesis, we show how this pattern can be rigorously defined by using Directional Change. Directional Change is a new way to summarise price changes in the market. It records a transaction price only when the market has moved in to an opposing direction by a significant degree , and where that margin of significant movement is defined by the observer. Unlike time series, Directional Change records data at irregular points. This thesis also shows how Head and Shoulder Bottom Patterns can be recognised by using Directional Change. Presenting a precise definition of Head and Shoulder pattern, therefore allows us to rigorously examine the effectiveness of a Head and Shoulder based trading strategy.