Trading rule discovery using technical analysis and a template matching technique for pattern recognition: Evidence from the Chinese stock market

Abstract

This paper examines the potential profit of bull flag trading rules in the Shanghai Stock Exchange Composite Index (SSE) using a template matching technique based on price pattern recognition. This paper fills a gap in the literature by applying a template matching technique for the recognition of bull flag patterns in the Shanghai Stock Exchange Composite Index (SSE) during the period of 1991–2021. To the best of our knowledge, no previous study has applied bull flag trading rules to the Chinese stock market. Our results indicate that bull flag trading rules can correctly predict the price movement direction of the index most of the time, achieving significantly positive excess profits. Moreover, shorter fitting windows and better quality of price fit values for lower holding periods are associated with better performance. This research may have relevant practical implications for investors who opt for this indicator in their asset allocation decisions.