Some candlestick patterns in trading

Some-candle-patterns-in-tradingOver the past three decades, candlestick patterns have gained considerable popularity in price forecasting in the financial markets. The attention of traders was immediately attracted by their ease of use. But the market is constantly changing. How is this tool today?

Reliability of candle patterns today

Even at the beginning of their popularity, not all patterns were equally reliable. Some were considered a guarantee of the implementation of a trading signal, while others gave only some probability of their triggering.
Today the situation has worsened even more. This is due to the fact that technological progress, like a rising tidal wave, washes away the old order. The rapid development of trading robots led to the fact that such patterns began to be incorporated into their programs. Moreover, if at first only large funds did this, now everyone and sundry are doing this. Programming candlestick pattern signals is the first thing beginners do on the path of algorithmic trading. Since the robots react instantly, this began to play against the reliability of the signals of such models.

Meanwhile, there are still candlestick patterns that work. Their reliability as independent instruments is not sufficient to obtain a stable income from trading operations. But in conjunction with other elements of a trading strategy, they are quite applicable. In other words, candlestick patterns today are not the foundation of trading, but only one of the filters of trading signals.

Consider some candle patterns

Absorption

Fig_1_AbsorptionFig.1 Absorption.

The nature of this figure is associated with a change in market sentiment. There is a gap between the close of the previous candle and the open of the next candle. Then something changes in the market, and the players begin to push the price in the opposite direction to the previous candle. By itself, this movement may be false. But if there are confirmations from other signals of the trading strategy, then this may indicate that a turning point has occurred. The market has taken it into account and is starting to win back. The pattern can be either bullish or bearish.

Hammer or hanged man

Fig_2_Hanged HammerFig. 2 Hammer and hanged man.

The formation of these models is influenced by the weakening of the players that dominated the market until that moment. Candles of such patterns have a small body and long tails. These “tails” indicate that during the trading period, players tried to push the price in one direction or another. But they gradually weakened, and their opponents returned the price to levels near the opening. This state of affairs led to the formation of a small body of the candle. These candlestick patterns can also give signals that mark the beginning of both the rise and fall of the markets.

morning Star

Fig_3_Morning_StarFig.3 Morning star

This candlestick pattern is already a bit more complicated. It consists of three candles. But, despite this, to explain its nature is very simple. The first candle in this pattern consists mainly of a long black body. This tells us that the market is dominated by sellers. They confidently push the price down, and no one can resist them.

Next comes a small candle. This testifies in favor of the fact that a force has appeared on the market that is able to withstand the bears. But, since the body of the candle is very small, this indicates the presence of a struggle between buyers and sellers in this trading period.

The last candle is directed upwards. She is big enough. This candlestick completes the pattern and indicates who has won the fight, namely the dominance of the buyers in the market.

A similar logic of the development of events during the formation of the evening star with the only difference that everything happens not in a falling market, but in a growing one. And in the end, it is not buyers who win in the struggle for the market, but sellers, which determines the further trend.

Fig_4_Evening_StarFig. 4 Evening star.

Harami

Rice_5_HaramiFig.5 Harami.

Harami means “pregnant” in Japanese. This is very descriptive and perfectly describes the nature of this formation in one single word. To make it clear, let’s analyze the nature of the formation of this candlestick pattern in more detail.

A long candle is replaced by another candle of the opposite color, the body of which is much smaller. The small candle should be positioned so as not to go beyond the price range of the previous candle. Figuratively, we can say that a large candle is a mother. The small one following her is her child, whom she gives birth to. This child will continue to exist, determining market trends.

Conclusion

Candlestick patterns are not just abstract signals, but formations generated by market processes. Their nature reflects the processes taking place in the market, which can be used in trading. But it should be remembered that by themselves they are not reliable enough. The reasons may be different. In small markets, large players quite successfully manipulate price behavior thanks to large capitals. In addition, as mentioned at the beginning, algorithmic trading technologies have appeared, which today are owned not only by large funds with their gigantic financial capabilities, but also by millions of small players, capable of creating serious financial strength with their mass.

If earlier only people with their speed of thinking, attention and reaction reacted to the signals of patterns, today robots do it. Their reactions are on a completely different level. And, as a result, the reaction of the market to patterns changes.

To improve the quality of signals, you need to collect statistics on the effectiveness of candlestick patterns in conjunction with a specific strategy, a specific trader (with his psychology, passions and opportunities), and in a specific market. Only in this case can tangible results be achieved.

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Author of articles on trading and investments, which I have been doing for more than 8 years. Even from your phone, you can open a deal, buy shares, build up capital in assets that will bring dividends even when you stop working. You can't just not think about it.

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