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Bridge over ocean
1 July 2004 Financial Analysts Journal Volume 60, Issue 4

Can Fuzzy Logic Make Technical Analysis 20/20?

  1. Xu-Shen Zhou
  2. Ming Dong

One of the most challenging areas in technical analysis is the automatic detection of technical patterns that would be similarly detected by the eyes of experts. In this study, cognitive uncertainty was incorporated in technical analysis by using a fuzzy logic–based approach. The results show that the algorithm can detect subtle differences in a clearly defined pattern. Significant postpattern abnormal returns were found that varied directly with the fuzziness of a pattern. This approach can be valuable for investors as a way to incorporate human cognition into historical trading statistics so as to form future winning strategies.

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