Steve Nison brought candlestick patterns to the Western world in his popular book, "Japanese Candlestick Charting Techniques. For related reading, see Candlestick Charting: Not all candlestick patterns work equally well. Their huge popularity has lowered reliability because they've been deconstructed by hedge funds and their algorithms. These well-funded players rely on lightning-speed execution to trade against retail and traditional fund managers who execute technical analysis strategies found in popular texts.
However, reliable patterns continue to appear, allowing for short- and long-term profit opportunities. The Multiple Strategies of Hedge Funds. 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. First, they only work within the limitations of the chart being reviewed, whether intraday , daily, weekly or monthly. Second, their potency decreases rapidly three to five bars after the pattern has completed. In the following examples, 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.
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 intrabar 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. 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. 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.
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.
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. To learn more, take a look at Advanced Candlestick Patterns. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. Candlestick Pattern Reliability Not all candlestick patterns work equally well. Three Line Strike The bullish three line strike reversal pattern carves out three black candles within a downtrend. 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.
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