Candlestick Pattern Reliability

1. CANDLESTICK PATTERN &
RELIABILITY

2. Points To Be Covered Today:
Candlestick Chart.
Candlestick Pattern Reliability.
Candlestick Performance.
Different Candlesticks.
The Bottom Line.

3. Candlestick Chart
 Candlestick charts are a technical tool that packs data for multiple time frames into
single price bars.
 This makes them more useful than traditional open-high, low-close bars or simple
lines that connect the dots of closing prices.
 Candlesticks build patterns that predict price direction once completed.
 Proper color coding adds depth to this colorful technical tool, which dates back to
18th-century Japanese rice traders.
 Steve Nison brought candlestick patterns to the Western world in his popular 1991
book, "Japanese Candlestick Charting Techniques.“
 Many traders can now identify dozens of these formations, which have colorful
names like bearish dark cloud cover, evening star, and three black crows.
 In addition, single bar patterns including the doji and hammer have been
incorporated into dozens of long- and short-side trading strategies.

4. KEY TAKE AWAYS
• Candlestick patterns, which are technical trading tools, have
been used for centuries to predict price direction.
• There are various candlestick patterns used to determine
price direction and momentum, including three line strike, two
black gapping, three black crows, evening star, and
abandoned baby.
• However, it’s worth noting that many signals emitted by these
candlestick patterns might not work reliably in the modern
electronic environment.

5. Candlestick Pattern Reliability
 Not all candlestick patterns work equally well.
 Their huge popularity has lowered reliability because they've been
analyzed by hedge funds and their algorithms.
 These well-funded players rely on lightning-speed execution to
trade against retail investors and traditional fund managers who
execute technical analysis strategies found in popular texts.

6. Candlestick Pattern Reliability - I
 Here are five candlestick patterns that perform exceptionally well as
precursors of price direction and momentum.
 Each works within the context of surrounding price bars in predicting
higher or lower prices.
 They are also time-sensitive in two ways:
1. They only work within the limitations of the chart being reviewed,
whether intraday, daily, weekly or monthly.
2. Their potency decreases rapidly three to five bars after the pattern has
completed.

7. Candlestick Performance
 This analysis relies on the work of Thomas Bulkowski, who built
performance rankings for candlestick patterns in his 2008
book, "Encyclopedia of Candlestick Charts."2
 
He offers statistics for two kinds of expected pattern outcomes:
1. reversal - Candlestick reversal patterns predict a change in price direction
2. continuation - Continuation patterns predict an extension in the
current price direction.
 In the next slides, the hollow white candlestick denotes a closing print
higher than the opening print, while the black candlestick denotes a
closing print lower than the opening print.

8. Three Line Strike
 The bullish three line strike reversal
pattern carves out three black candles
within a downtrend.
 Each bar posts a lower low and closes
near the intra bar low.
 The fourth bar opens even lower but
reverses in a wide-range outside bar
that closes above the high of the first
candle in the series.
 The opening print also marks the low of
the fourth bar. According to Bulkowski,
this reversal predicts higher prices with
an 83% accuracy rate.

9. Two Black Gapping
 The bearish two
black gapping continuation pattern
appears after a notable top in an uptrend,
with a gap down that yields two black bars
posting lower lows.
 This pattern predicts that the decline will
continue to even lower lows, perhaps
triggering a broader-scale downtrend.
 According to Bulkowski, this pattern
predicts lower prices with a 68% accuracy
rate.

10. Three Black Crows
 The bearish three black crows reversal
pattern starts at or near the high of an
uptrend, with three black bars posting lower
lows that close near intra bar lows.
 This pattern predicts that the decline will
continue to even lower lows, perhaps
triggering a broader-scale downtrend.
 The most bearish version starts at a new
high (point A on the chart) because it traps
buyers entering momentum plays.
 According to Bulkowski, this pattern predicts
lower prices with a 78% accuracy rate.

11. Evening Star
 The bearish evening star reversal pattern
starts with a tall white bar that carries an
uptrend to a new high.
 The market gaps higher on the next bar, but
fresh buyers fail to appear, yielding a narrow
range candlestick.
 A gap down on the third bar completes the
pattern, which predicts that the decline will
continue to even lower lows, perhaps
triggering a broader-scale downtrend.
 According to Bulkowski, this pattern predicts
lower prices with a 72% accuracy rate.

12. Abandoned Baby
 The bullish abandoned baby reversal pattern
appears at the low of a downtrend, after a
series of black candles print lower lows.
 The market gaps lower on the next bar, but
fresh sellers fail to appear, yielding a narrow
range doji candlestick with opening and
closing prints at the same price.
 A bullish gap on the third bar completes the
pattern, which predicts that the recovery will
continue to even higher highs, perhaps
triggering a broader-scale uptrend.
 According to Bulkowski, this pattern predicts
higher prices with a 49.73% accuracy rate.

13. The Bottom Line
 Candlestick patterns capture the attention of market players, but many
reversal and continuation signals emitted by these patterns don't work
reliably in the modern electronic environment.
 Fortunately, statistics by Thomas Bulkowski show unusual accuracy for a
narrow selection of these patterns, offering traders actionable buy and sell
signals.
 Putting the insights gained from looking at candlestick patterns to use and
investing in an asset based on them would require a brokerage account.
 To save some research time, Investopedia has put together a list of
the best online brokers so you can find the right broker for your investment
needs.

14. Three White Soldiers
 Another three-stick candle is the three white
soldiers.
 It is made up of three long green candles in a
row, generally with microscopic shadows.
 The condition is that the three consecutive
greens have to open and close higher than the
previous period.
 It is regarded as a strong bullish signal that
shows up after a downtrend

15. Dark Cloud Cover
 The dark cloud cover pattern anticipates a bearish reversal.
 The pattern comprises two candlesticks – a red candle that opens above
the previous green body and closes below its midpoint.
 It suggests that bears have taken control over the market, pushing prices
lower.
 If the shadows of the candles are short, then traders could expect a strong
downtrend.

16. Spinning Top
 The spinning top is a candlestick with a
short body.
 However, the two shadows are of equal
length, leaving the body right in the
middle.
 This pattern also indicates indecision and
may suggest a period of rest or
consolidation after a significant rally or
price decline.

17. Falling Three-Method
Falling three-method is a pattern consisting of five candles,
indicating the continuation of a downtrend.
It comprises a long red body, followed by three consecutive
green bodies that are small, and then another long red body.
The green candles are all covered by the bearish reds,
demonstrating that bulls don’t have enough power to reverse the
downtrend.

18. Rising Three Method
There is the rising three methods pattern as well,
which can be observed during uptrends.
 The pattern comprises a long green followed by three
small red candles and then another long green.

19. Morning Star
 The morning star is a more complex pattern
because it comprises three candlesticks: a
long red followed by a short-bodied candle and
then a long green.
 Usually, the middle candle will have no overlap
with the longer ones.
 The morning start suggests that the first
period’s selling pressure is fading, and a bull
market is forming.

20. CANDLESTICK PATTERN &
RELIABILITY

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CANDLESTICK PATTERN & RELIABILITY